A. Questions for Submission

7.1 Classical Investment Philosophies

1. Warren Buffet wrote that, `Price is what you pay; value is what you get'. Explain. What are the possible problems with this investment philosophy? Do you find Buffet's view plausible?
2. What is chartism? Is it just a matter of 'financial astrology'? Or, do you find this investment philosophy plausible?

7.2 Random prices and rates of return

1. Explain the analogy between the motion of fat globules in water and security prices in a market.
2. Compare the random price hypothesis to the random rate of return hypothesis. When do you think it is reasonable to adopt (or reject) either one? Why?
3. Is it possible to adopt the random rate of return hypothesis in a model, and still reasonably believe in a fundamentalist or chartist investment philosophy? Explain.

B. For Further Thought (No Submission)

• What does the random walk? The underlying human mechanisms that determine the price of a stock are invisible to us, which suggests we might use a random walk to describe it. But how can one determine if it is price or rate of return (or something else entirely) that is doing the random walk?
• Not so random after all? With almost no exceptions, a sugar molecule in water will experience about a trillion collisions a second that give rise to its jiggling motion. But an unpopular stock price may have less than a hundred analogous human effects influencing its value. How can such cases make the random walk model less accurate?
• Approximations. When the rate of return is small, a log-normally distributed collection of prices is approximately equal to a normally distributed collection of prices. We might similarly expect that the log-normally distributed collection is actually just an approximation of some yet-more-accurate distribution. Is this a problem for our model, or at least, for the extent to which we think the model correctly describes the world?