• A random walk is one in which future steps or directions cannot be predicted on the basis of past history. When the term is applied to the stock market, it means that short-run changes in stock prices are unpredictable. Investment advisory services, earnings forecasts, and complicated chart patterns are useless

  • Stock returns are determined by
    • the initial dividend yield at which the stocks were purchased
    • the growth rate of earnings, and (3) changes in valuation in terms of price-earnings (or price-dividend) ratios
  • Bond returns are determined by
    • the initial yield to maturity at which the bonds were purchased
    • changes in interest rates (yields) and therefore in bond prices for bond investors who do not hold to maturity