The Volatility of the Stock Market: Difference between revisions
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==A Random Walk?== | ==A Random Walk?== | ||
In his famous book, "A Random Walk Down Wall Street," Burton Malkiel explains the Random Walk Theory, In essence, the random walk theory wspouses the belief that future stock prices cannot be predicted. It says that a blindfolded moonkey throwing darts at the newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by the experts." He describes the investing in the Stock Market as being "a gamble whose success depends on an ability to predict the future." The intrigue, therefore, is just that. There is a great deal of uncertainty involved however the payoff is can be very great. | In his famous book, "A Random Walk Down Wall Street," Burton Malkiel explains the Random Walk Theory, "In essence, the random walk theory wspouses the belief that future stock prices cannot be predicted. It says that a blindfolded moonkey throwing darts at the newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by the experts." (Malkiel, 1973) He describes the investing in the Stock Market as being "a gamble whose success depends on an ability to predict the future." The intrigue, therefore, is just that. There is a great deal of uncertainty involved however the payoff is can be very great. | ||
Malkiel divides the approaches to "predicting the future" into two categories: "The firm-foundation Theory" and the "castle in the sky theory," and these theories appear to be mutually exclusive. | Malkiel divides the approaches to "predicting the future" into two categories: "The firm-foundation Theory" and the "castle in the sky theory," and these theories appear to be mutually exclusive. | ||
===The Firm Foundation Theory=== | ===The Firm Foundation Theory=== | ||
This theory argues that each common stock (representative of a certificate of part ownership of a corporation) has a firm anchor of | This theory argues that each common stock (representative of a certificate of part ownership of a corporation) has a firm anchor of something called intrinsic value, which can be determined by careful analysis of the firm's current position and future prospects. (Malkiel, 1973) Market prices flling below this firm foundation of intrisic value means a buying opportunity, because, according to the theory, price fluctuation is eventually corrected. Conversely, with prices rising above this value comes a selling opportunity. | ||
Revision as of 13:34, 4 May 2006
A Random Walk?
In his famous book, "A Random Walk Down Wall Street," Burton Malkiel explains the Random Walk Theory, "In essence, the random walk theory wspouses the belief that future stock prices cannot be predicted. It says that a blindfolded moonkey throwing darts at the newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by the experts." (Malkiel, 1973) He describes the investing in the Stock Market as being "a gamble whose success depends on an ability to predict the future." The intrigue, therefore, is just that. There is a great deal of uncertainty involved however the payoff is can be very great. Malkiel divides the approaches to "predicting the future" into two categories: "The firm-foundation Theory" and the "castle in the sky theory," and these theories appear to be mutually exclusive.
The Firm Foundation Theory
This theory argues that each common stock (representative of a certificate of part ownership of a corporation) has a firm anchor of something called intrinsic value, which can be determined by careful analysis of the firm's current position and future prospects. (Malkiel, 1973) Market prices flling below this firm foundation of intrisic value means a buying opportunity, because, according to the theory, price fluctuation is eventually corrected. Conversely, with prices rising above this value comes a selling opportunity.
