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If price changes reflect new information, why should returns fluctuate randomly?
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Consider the following stock price sequence:
|
t
|
Pt
|
|
1
|
50
|
|
2
|
51
|
|
3
|
52
|
|
4
|
58
|
|
5
|
56
|
Compute three-day moving averages for days 3, 4, and 5. If one assumes that the three-day moving average price represents the true value of the stock because of the elimination of noise, should the investor buy or sell shares on days 3, 4, and 5?