# Definition of __random walk theory__

## random walk theory

Security prices change **random**ly, with no predictable trends or patterns.

# Related Terms:

**theory** that stock price changes from day to day are at **random**; the changes are independent

of each other and have the same probability distribution. Many believers of the **random walk theory** believe

that it is impossible to outperform the market consistently without taking additional risk.

The analysis of principal-agent relationships, wherein one person, an agent, acts on behalf of

anther person, a principal.

An alternative model to the capital asset pricing model developed by

Stephen Ross and based purely on arbitrage arguments.

Security prices sometimes move wildly above their true values.

A **random** value that can take any fractional value within specified ranges, as

contrasted with a discrete variable.

A **random** variable that can take only a certain specified set of discrete possible

values - for example, the positive integers 1, 2, 3, . . .

**theory** that expected spot exchange rate equals the forward rate.

A biased expectations **theory** that asserts that the implied forward

rates will not be a pure estimate of the market's expectations of future interest rates because they embody a

liquidity premium.

A form of the pure expectations **theory** which suggests that the returns on bonds

of different maturities will be the same over a short-term investment horizon.

A biased expectations **theory** that asserts that the

shape of the yield curve is determined by the supply of and demand for securities within each maturity sector.

Principles underlying the analysis and evaluation of rational portfolio choices

based on risk-return trade-offs and efficient diversification.

Holds that the futures price will be bid down to a level below the expected

spot price.

A **random** variable that has a normal probability distribution.

Firms prefer to issue debt rather than equity if internal finance is insufficient.

A biased expectations **theory** that believes the term structure reflects the

expectation of the future path of interest rates as well as risk premium. However, the **theory** rejects the

assertion that the risk premium must rise uniformly with maturity. Instead, to the extent that the demand for

and supply of funds does not match for a given maturity range, some participants will shift to maturities

showing the opposite imbalances. As long as such investors are compensated by an appropriate risk premium

whose magnitude will reflect the extent of aversion to either price or reinvestment risk.

## Pure expectations theory

A **theory** that asserts that the forward rates exclusively represent the expected

future rates. In other words, the entire term structure reflects the markets expectations of future short-term

rates. For example, an increasing sloping term structure implies increasing short-term interest rates. Related:

biased expectations theories

## Quantity Theory of Money

**theory** that velocity is constant, and so a change in money supply will change nominal income by the same percentage. Formalized by the equation Mv = PQ.

## Random-location storage

The technique of storing incoming inventory in any

available location, which is then tracked in a locator file.

## Random variable

A function that assigns a real number to each and every possible outcome of a **random** experiment.

## Randomized strategy

A strategy of introducing into the decision-making process a **random** element that is

designed to reduce the information content of the decision-maker's observed choices.

## Real Business Cycle Theory

Belief that business cycles arise from real shocks to the economy, such as technology advances and natural resource discoveries, and have little to do with monetary policy.

## Static theory of capital structure

**theory** that the firm's capital structure is determined by a trade-off of the

value of tax shields against the costs of bankruptcy.

## theory of constraints (TOC)

a method of analyzing the bottlenecks

(constraints) that keep a system from achieving

higher performance; it states that production cannot take

place at a rate faster than the slowest machine or person

in the process

## trade-off theory

Debt levels are chosen to balance interest tax shields against the costs of financial distress.

**Related to : financial, finance, business, accounting, payroll, inventory, investment, money, inventory control, stock trading, financial advisor, tax advisor, credit.**