Which of the following can lead to market efficiency?
I. Market timing
II. Investor rationality
III. Arbitrage
IV. Independent deviation from rationality
A) I and III
B) II and IV
C) II, III and IV
D) I, II and III
E) I, II, III and IV

Question

Quizplus · Accepted Answer

Market efficiency can be achieved through investor rationality (II), which implies that market participants incorporate all available information into security prices. In this way, prices reflect the fair values of securities, making it harder for investors to earn returns that exceed the expected values for their level of risk. Arbitrage (III) is another mechanism that contributes to market efficiency, as it involves exploiting market inefficiencies for profits by simultaneously buying low and selling high. Finally, independent deviation from rationality (IV) is not desirable and can cause market inefficiencies, as it reflects actions not based on fundamental information, which can lead to distorted prices. Market timing (I) does not necessarily lead to market efficiency, as it implies attempts to predict future price movements by taking positions in the market. Such strategies are often based on incomplete or unreliable information, making them potentially less profitable than passive investing strategies.

Which of the Following Can Lead to Market Efficiency