RANDOM WALKS AND INDEX FUNDS

The efficient markets hypothesis is a theory about how financial markets work. The theory is probably not completely true As we discuss in the next section, there is reason to doubt that stockholders are always rational and that stock prices are information-ally efficient at every moment. Nonetheless, the efficient markets hypothesis does much better as a description of the world than you might think. There is much evidence that stock prices, even if not exactly a random walk, are very close to it. For example, you might be tempted to buy stocks that have recently risen and avoid stocks that have recently fallen (or perhaps just the opposite). But statistical studies have shown that following such trends