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8.If a stock price follows a Markov process which of the following could be true

A.Whenever the stock price has gone up for four successive days it has a 70% chance of going up on the fifth day.

B.Whenever the stock price has gone up for four successive days there is almost certain to be a correction on the fifth day.

C.The way the stock price moves on a day is unaffected by how it moved on the previous four days.

D.Bad years for stock price returns are usually followed by good years.

A.Whenever the stock price has gone up for four successive days it has a 70% chance of going up on the fifth day.

B.Whenever the stock price has gone up for four successive days there is almost certain to be a correction on the fifth day.

C.The way the stock price moves on a day is unaffected by how it moved on the previous four days.

D.Bad years for stock price returns are usually followed by good years.

Answer: C

A Markov process is a particular type of stochastic process where only the current value of a variable is relevant for predicting the future. Stock prices are usually assumed to follow Markov processes. This corresponds to a weak form market efficiency assumption.

A Markov process is a particular type of stochastic process where only the current value of a variable is relevant for predicting the future. Stock prices are usually assumed to follow Markov processes. This corresponds to a weak form market efficiency assumption.

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015