Final answer:
According to the random walk hypothesis, the best prediction of tomorrow's stock price is today's price due to unpredictability in market movements. The hypothesis describes the market's short-term fluctuations as random, but with an overall long-term upward trend. However, consistently predicting stock winners is nearly impossible, even for financial professionals.
Step-by-step explanation:
According to the random walk hypothesis, the best prediction of tomorrow's stock price is essentially today's stock price, since future market movements are largely unpredictable. The concept of the random walk suggests that stock prices fluctuate randomly from day to day, and while analysts and investors may search for undervalued companies or future winners, their efforts are equivalent to a random guess due to the unexpected news that continually alters market expectations.
Stock prices taking a 'random walk with a trend' implies that movements are unpredictable in the short term; however, the market tends to trend upwards over time. Regardless, predicting individual stock winners is highly challenging, and not even financial professionals can consistently beat the market average by selecting winning stocks. This difficulty stems from the unpredictable nature of news that affects company valuations and, consequently, their stock prices.