Question

Predictable cycles in stock price movements

I) tend to persist for a long time;
II) tend to self-destruct as soon as investors recognize them;
III) never appear, since stock returns change randomly

A. I, II, and III
B. III only
C. I only
D. II only

Answer 1

Predictable cycles in stock market movements do not persist for long and tend to self-destruct once investors recognize them (Option II only), due to the unpredictable nature of future news influencing stock prices.

Step-by-step explanation:

In addressing the question concerning predictable cycles in stock price movements, one must understand that predicting future stock winners is fundamentally problematic because no one can foretell future news that alters profit expectations. Hence, stock prices are subject to a random walk with a trend which implies they might fluctuate unpredictably in the short term, although generally trending upwards over time.

Option II suggests that any predictable pattern is likely to self-destruct once it is widely recognized by investors. This is because once such a pattern is detected, many investors may attempt to exploit it, which in turn alters the pattern. Contrary to Option I, cycles do not persist for a long time due to market efficiency, and Option III is misleading as it denies the presence of any predictable component in stock price movements, despite their general trend upwards.

Overall, the most accurate choice here is Option D: II only, recognizing that predictable cycles tend to self-destruct when they become widely known among investors.