random walk theory- investment
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Know about RWTAlso called as Weak Form of Efficiency.Prices are based on the inflow of news which randomly occur in the market.Future prices cannot be predicted.Buying and selling information lead the trader align with the intrinsic value.
Simulation Test
Serial Correlation Test
Run Test
Filter Test
Simulation Test Performed by Harry Roberts.Examine the appearance of Dow
Jones index expressed in levels and weekly changes
Changes are generated from random numbers & then converted to graphs depicting levels of the Dow Jones index.
Simulation Test
Serial Correlation• Examine by Moore in 1964.• Correlate the price change in one
week to price change in another week.
• Price changes are correlated, points plotted in graph tend to lie in the straight line.
• He considered avg correlation to be 0.06%, if low low tendency.
Filter TestStock moves up with percent
Buy it and it for a long period.When the same percent falls
Sell it.It Ranges from 0.5% to 50%.For eg:- Assume filter to be 10%.
Price is Rs 20, Buy at Rs 22 & reached till Rs 30 & fall, Sell at Rs. 27.
Run TestIt is a set of consecutive prices of the same sign.If increase “+” & decrease “-”.
Shares Number of Runs
ABC
+ + + + + +………2+-+-+-+-+ -…..10- -+- + + +- - -….6