Chapter 13 Efficient Markets and Behavioral Finance 331
bre44380_ch13_327-354.indd 331 09/11/15 07:55 AM
offers a normal risk-adjusted rate of return. Therefore, as soon as a cycle becomes apparent to
investors, they immediately eliminate it by their trading.
You should see now why prices in competitive markets must follow a random walk. If past
price changes could be used to predict future price changes, investors could make easy profits.
But in competitive markets, there are no such free lunches. As investors try to take advantage
of any information in past prices, prices adjust immediately until the superior profits from
studying price movements disappear. As a result, all the information in past prices will be
◗ FIGURE 13.1 Each dot shows a pair of returns for a stock on two successive days between December 1991
and December 2014. The circled dot for Microsoft records a daily return of +2.9% and then –2.9% on the next day. The
scatter diagram shows no significant relationship between returns on successive days.252423222101234525 23 21 135Microsoft (correlation 5 2 .035)Return on day t, %Return on dayt^11, %Deutsche Bank (correlation = .055)25
25 23 21 135
Return on day t, %24232221012345Return on dayt^11, %Philips Electronics (correlation = 2 .016)25 23 21 135
Return on day t, %2524232221012345Return on dayt^11, %Sony (correlation = .001)25 23 21135
Return on day t, %2524232221012345Return on dayt^11, %