Efficient markets tend to exist:
A)only when all investors are rational.
B)anytime market volume exceeds the average trading volume.
C)only when market volatility is low.
D)when rational arbitrage traders dominate irrational traders.
E)when arbitrage trading is prohibited.

Question

Quizplus · Accepted Answer

Efficient markets require the presence of rational arbitrage traders who can take advantage of any mispricing or inefficiencies in the market. These arbitrageurs would take actions to correct the mispricings, which would bring the market back to efficiency. If irrational traders were dominant, then the market would be inefficient as they would not correct the mispricings leading to potential profit opportunities for rational traders. Therefore, option D, when rational arbitrage traders dominate irrational traders, is the best choice.

Efficient Markets Tend to Exist