BSAC3209College of Economic and Business

Administration
BSAC3209: Financial Management II
Advanced Diploma
Fall – AY 2024 – 2025

STUDENT NAME Fatema Abdullah Al

Mahrouqi
Muzna Humaid Al Khatri
Buthaina Yousif
Alaamri
Zuwaina Maan Al-
Hinaai
STUDENT ID S21J19010
S21J1918
S21s1920
S21J19142
DATE OF SUBMISSION 21/November
Part A: Introduction to Random Walk Theory

1. Definition of Random Walk Theory:

The idea that stock prices are stochastic processes

was first put forth by French mathematician Louis
Bachelier in the early 20th century, and this is where
Random Walk Theory got its start. This hypothesis
became more widely accepted in the finance industry
over the years, especially as financial mathematics
advanced. According to the Random Walk Theory
(RWT), a stochastic process that may be represented
as a random walk governs the price fluctuations of
financial assets like stocks and currencies. This
indicates that an asset's future price fluctuations are
mostly influenced by random factors and are not
influenced by its historical price movements. RWT
basically asserts that price fluctuations are erratic and
follow a trajectory.
 2. Key assumptions of the theory.
The random walk theory of economics implies
that stock prices follow a random and
unpredictable pattern. It contends that future
price movements cannot be reliably
anticipated based on past prices or any other
information, because stock prices adapt
instantly to new information, leaving previous
data obsolete.
This theory asserts that stock price
fluctuations are independent and identically
distributed, implying that each price shift is
unrelated to the preceding one and has an
equal chance of being up or down.
Furthermore, the theory presupposes that all
market participants have equal access to
information and that prices accurately reflect
all available information. This leads to the
Efficient Market Hypothesis, which states that
it is difficult to continually outperform the
market by exploiting mispriced equities.
3. How RWT is related to the Efficient
Market Hypothesis (EMH).
Two closely similar ideas in finance that
explain how asset prices move in the
market are the Random Walk Theory (RWT)
and the Efficient Market Hypothesis (EMH).

Random Walk Theory (RWT):

The basic idea behind Random Walk Theory
(RWT) is that stock prices move randomly and
that future price changes are unaffected by
previous ones. Accordingly, previous price
fluctuations cannot be used to forecast future
ones.
• Implication: Technical analysis and stock
selecting cannot reliably produce returns
greater than the market as a whole if stock
prices are random.

The hypothesis of an efficient market

(EMH):
• EMH's basic premise is that financial
markets are "informationally efficient," which
 means that asset prices at any given moment
represent all available information. As a
result, it is impossible to continuously "beat
the market" while considering risk.
• Types of EMH:
• Weak Form: No information from historical
prices or volume data can be utilised to
forecast future prices.
• Semi-Strong Form: Stock prices already take
into account all information that is accessible
to the public.
• Strong Form: Stock prices represent all
available information, both public and private.

Relationship Between RWT and EMH:

1. Foundation: RWT can be seen as a specific
application or consequence of the broader
EMH. If markets are efficient (as EMH
suggests), then stock prices should follow a
random walk because they reflect all available
information.
. Market Efficiency: Under the weak form of
2

EMH, past price movements do not help in

predicting future prices, which aligns with the
concept of a random walk. Both imply that
systematic trading strategies based on
 historical price data are unlikely to yield
consistent profits.
3. Investment Strategy: Both theories suggest
that active trading strategies may not
outperform a passive investment strategy,
such as buying and holding an index fund,
because price movements are unpredictable.

In summary, RWT and EMH are

interconnected in their implications about
market behavior. RWT supports the notion
of EMH by suggesting that price
movements are random and unpredictable
if the market is efficient. Together, they
provide a framework for understanding the
limitations of forecasting and the
performance of investment strategies in
financial markets.
4) Examples of financial assets (e.g.,
stocks, exchange rates) that are often
analyzed under RWT
According to the random walk theory,
financial asset prices fluctuate at random and
cannot be predicted from historical trends.
The following are some instances of financial
assets that are frequently examined using this
theory:

1. Stocks: Individual company shares are

frequently analysed to see if there are any
discernible trends or if price changes are
random.
2. Exchange Rates: A variety of factors
influence currency prices, which many
analysts view as random walks.

3. Commodities: Given their susceptibility to

world events, the prices of commodities such
as gold, oil, and agricultural products are
examined for random walk behaviour.
4. Bonds: Random walk analysis can also be
used to the pricing of corporate and
government bonds, especially when interest
rate fluctuations are involved.

5. Real Estate values: Despite being impacted

by regional market circumstances, some
research indicates that during specific time
periods, real estate values may display
random walk characteristics.
6. ETFs and mutual funds: The random walk
theory can be used to analyse the
performance of these pooled investment
vehicles in order to determine how
predictable the returns are.

7. Cryptocurrencies: Due to their extreme

volatility, cryptocurrencies are frequently the
focus of random walk analysis because of how
chaotic their price fluctuations can seem.
The purpose of analysing these assets is to
comprehend market efficiency, market
behaviour, and the consequences for
investment strategies.

Part B: Data Collection and Analysis

 Bank NIZWA
https://docs.google.com/file/d/1CHo-TS4fJPjCJR-
reVJOn4xSRT_Ki5Z4/edit?
usp=docslist_api&filetype=msexcel
 Bank Sohar

https://docs.google.com/file/d/
1n15QdwWhaYrUBMVGq7QEOuAxnmfx2Tw7/
edit?usp=docslist_api&filetype=msexcel

6. Bank Sohar
The stock price movements appear relatively stable
overall, with the Open, High, Low, and Close prices
staying very close to each other on most days. There
don't seem to be any major spikes or drops in the
stock price during the time period covered.

The Volume column shows the trading volume, and

this tends to fluctuate more than the price itself, with
some days having significantly higher volume than
others. However, the price itself remains quite steady,
varying only in the 0.10 range on most days.

They appear relatively consistent and lacking in

extreme volatility. the stock price movements seem to
be relatively stable.
Bank Nizwa :

The stock price movements do not appear to have

any clear, consistent patterns or trends. The open,
high, low, and close prices remain relatively stable at
$0.10 for the majority of the time period, with only
minor fluctuations. The volume of shares traded also
does not show any obvious trends, varying
significantly from day to day without a clear
direction.

The overall impression is that the stock price

behavior seems rather random, without any
discernible patterns or trends that would suggest
predictable movements. The data points to a
relatively stable, flat stock price over the time period
covered, with sporadic changes in trading volume but
no sustained upward or downward trajectory.
 7. Discuss how the Random Walk Theory
affects the strategies of investors and
traders in the stock markets.
Bank Sohar :
According to the Random Walk Theory (RWT),
future price fluctuations are unaffected by
historical trends since stock prices move
randomly and are not impacted by prior
movements. For traders and investors at
organisations like Bank Sohar and elsewhere,
this has important ramifications. RWT
influences their strategies in the
following strategies:
Implications for Investors

1. Long-Term Investment Strategy: -Buy and

Hold: Investors may choose to buy and hold
equities in the hope that, despite short-term
volatility, the market will eventually reflect
their actual value.
Investors frequently diversify their portfolios
across various industries and asset classes in
order to reduce the risks associated with price
randomness.

2. Market Timing: RWT contends that it is

pointless to time the market. Investors may
choose to concentrate on long-term growth
rather than trying to forecast market changes.

3.Rather than attempting to forecast stock

price fluctuations based on previous data,
investors may depend more on fundamental
research, which focusses on a company's
financial health.
Implications for Traders

1. Short-Term Tradingp:
- Traders may need to adjust their
strategies, as the Random Walk Theory
implies that short-term price movements are
unpredictable.
- Algorithmic Trading: Some may turn to
algorithmic trading, using quantitative models
to identify patterns, though RWT challenges
the effectiveness of such models over time.
2. Risk Management: - Because stock
movements are unpredictable, traders
prioritise risk management strategies like
stop-loss orders to guard against unexpected
losses.

3. Behavioural Factors: - Traders may

research investor and market psychology,
understanding that although price fluctuations
are arbitrary, market mood might generate
opportunities in the near term.

In a market like Bank Sohar, where local

economic conditions and investor behavior
can influence stock prices, the Random Walk
Theory encourages a blend of strategies.
While long-term investors may focus on
fundamentals and diversification, traders
might prioritize risk management and adapt
their strategies to the inherent
unpredictability of the market. This dual
approach allows participants to navigate the
complexities of stock trading while
acknowledging the foundational tenets of
RWT.

Bank Nizwa:
According to the Random Walk Theory (RWT),
stock values fluctuate randomly and cannot
be predicted from historical trends. For
traders and investors involved in markets
such as Bank Nizwa, this has significant
ramifications. This is how RWT affects their
tactics:
Consequences for Investors

1.Despite short-term volatility, investors may

choose to adopt a long-term perspective,
thinking that the market will eventually
represent the underlying worth of companies.
This is known as the Investment Horizon.
Buy-and-Hold Strategy: Rather than trying to
time entry and departure points, many people
may choose a buy-and-hold strategy that
depends on the market's general growth.

2. In order to mitigate risk, investors

frequently diversify their holdings over a
range of industries and asset classes, which
lessens their exposure to the volatile
fluctuations of any one stock.

3. Decreased Emphasis on Technical Analysis:

- Investors may prioritise fundamental
analysis above technical analysis and chart
patterns since historical price movements can
not predict future performance.

Consequences for Traders

1.The notion that short-term price changes

are mostly random is one that traders must
deal with when using Short-Term Trading
Strategies. They might decide to use more
adaptable and responsive tactics as a result.
- Day Trading and Scalping: Although it is
always risky, some traders may use short-
term trading tactics in an attempt to profit
from slight price changes.
2. Risk Management: Effective risk
management is essential due to the
unpredictability of stock movements. To
reduce possible losses, traders frequently
employ strategies like stop-loss orders.

3. Behavioural Trading: Acknowledging that

investor psychology can generate short-term
opportunities even while prices are random,
traders may concentrate on market mood and
behavioural trends.

In the context of Bank Nizwa, the Random

Walk Theory encourages a strategic blend of
approaches among investors and traders.
Investors may lean towards long-term
strategies and diversification, while traders
might focus on risk management and
behavioral insights. Understanding the
implications of RWT helps market participants
navigate the complexities of stock trading in a
way that acknowledges both the randomness
of price movements and the potential for
rational decision-making.
Reference:
https://www.argaam.com/om-ar/companies/msm/bank-
nizwa/overview