Final answer:
Valuation ratios can exhibit different behaviors depending on market efficiency and investor behavior, often following a mean-reverting or random walk process or a combination of both.
Step-by-step explanation:
Valuation ratios, such as price-to-earnings (P/E) ratio, follow different processes based on market conditions and investor behavior. While in some cases they might exhibit characteristics of a mean-reverting process, where the ratio tends to move back towards a long-term mean over time, other circumstances may see them behaving more like a random walk process, particularly in very efficient markets. If the stock market is semi-strong form efficient, all available public information is already reflected in stock prices, and valuation ratios should change only in response to new public information being released.
While the movement of valuation ratios can sometimes appear random, in many cases, investors expect valuation indicators to revert back to a historical mean, suggesting a belief in some level of predictability in the market. However, it's important to note that market efficiency and investor behavior can greatly influence which process valuation ratios might follow. The claim that all of the above processes are possible reflects the complexity and the dynamic nature of financial markets.