Random Walk Theory

Random Walk Theory

The theory that stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement.

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In short, this is the idea that stocks take a random and unpredictable path. A follower of the random walk believes it's impossible to outperform the market without assuming additional risk. Tenets of the theory, however, recognize that stocks maintain an upward trend over time.

This theory raised a lot of eyebrows in 1973 when author Burton Malkiel wrote A Random Walk Down Wall Street, which remains on the top-seller list for finance books.

See also: Efficient Market Hypothesis (EMH), Market, Risk