How does that jibe with the random walk theory?
The efficient market theory and the random walk theory aren’t the same thing. The efficient market theory is much more powerful than the random walk theory, which merely postulates that the future price movements can’t be predicted from past price movements alone. One extreme version of the efficient market theory says, not only is the market continually adjusting all prices to reflect new information but, for whatever reason, the expected returns the returns investors require to hold stocks are constant through time. [For example, we know that, since the ’20s, returns on the New York Stock Exchange common stocks have averaged a little over 10% per year.] I don’t believe that. Economically, there is no reason why the expected return on the stock market has to be the same through time. It could be higher in bad times if people become more risk-averse; it could be lower in good times when people become less risk-averse. So risk is the component that leads to how much you get paid? It cou
