The efficient market hypothesis posits that daily share price movements are random and that all stocks are priced with the expectation that the holder of an asset earning a profit over time. If investors thought the price of an asset would go down, they would sell it down to a level where someone was willing to hold it. And someone is only willing to hold a stock if they believe it will deliver a positive rate of return. Statistically, academics model this price behavior with a normal distribution.
The daily expected rate of return on a stock is depicted by mu (μ) on the chart above. The randomness of returns around that expectation is measured by volatility (σ). 68.2% of the time we should see returns fall within 1 standard deviation up or down, with the probability of each occurring being the same. But do stocks prices really behave that way? In this post, we will take a closer look a the "day of the week" effect.
