Final answer:
It is true that in a completely competitive market, security prices typically follow a random walk due to the unpredictable nature of future news impacting profit expectations.
The 'random walk with a trend' concept points out that while daily price changes are unpredictable, over time stocks tend to gradually climb.
Step-by-step explanation:
The statement that 'in a completely competitive market, security prices follow a random walk' can be considered true. In financial markets, especially those that are completely competitive, the unpredictability of future news that could affect profit expectations means that security prices respond to this information in an unpredictable manner.
This behavior is described by what mathematicians term a "random walk with a trend". The random walk suggests that on a day-to-day basis, there is an equal likelihood of stock prices moving up or down.
However, the phrase 'with a trend' indicates that over time, there is a tendency for the value of stocks to climb, as upward movements are typically larger compared to downward ones, reflecting the overall growth trend of the market.
However, it's important to note that while this 'random walk' model is widely accepted as a depiction of stock price movements,
actual market conditions may vary due to a multitude of factors, including market inefficiencies, investor behavior, and regulatory influences that can affect the strict adherence to the random walk theory.