Did you wonder how the ‘fake’ stock prices in the previous blog were generated?  Statisticians have long noticed that stock prices bump around in a way that can be described as a random walk.

Random walk is the technical name given to a statistical process where the object fluctuates in a totally unpredictable manner, much like the results from tossing a fair coin (the chance of each throw landing on a head (H) or tail (T) being equal to 0.5). As anyone who has thrown coins in their spare time knows, occasionally one sees ‘nice’ sequences like HHHH or TTTT and we are tempted to think that the coin has remembers the past and repeats it.  Yet, the chance of a next coin toss giving a H or T remains at 50-50 (otherwise, yours is a biased coin).

Now, swap heads and tails for ‘up’ and ‘down’ for stock prices …