random walk theory

Definition

An investment theory which claims that market prices follow a random path up and down, without any influence by past price movements, making it impossible to predict with any accuracy which direction the market will move at any point. In other words, the theory claims that path a stock's price follows is a random walk that cannot be determined from historical price information, especially in the short term. Investors who believe in the random walk theory feel that it is impossible to outperform the market without taking on additional risk, and believe that neither fundamental analysis nor technical analysis have any validity.
However, some proponents of this theory do acknowledge that markets move gradually upward in the long run.

Use random walk theory in a sentence

You should try and figure out if the time is right for you to implement the random walk theory on this investment.

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Waldo liked to time financial markets, in an effort to buy low and sell high, but his friend Floyd pooh-poohed this strategy, and espoused the random walk theory-that you cannot predict the future based on the past.

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My hedge fund manager scoffs at random walk theory and believes that anyone who is as smart as he is can break through the randomness of Wall Street to make a fortune.

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