Markets would be inefficient if irrational investors __________ and actions of arbitragers were __________.
A)existed; unlimited
B)did not exist; unlimited
C)existed; limited
D)did not exist; limited Markets would be inefficient if irrational investors existed and actions if arbitragers were limited.

Question

Quizplus · Accepted Answer

If irrational investors existed (i.e. making decisions based on emotions rather than logic), then market prices would be influenced by factors other than fundamental value, leading to inefficiencies. However, if actions of arbitragers were limited (i.e. those who have the power to correct market inefficiencies by buying low and selling high), then these inefficiencies would persist. Therefore, in order to have an efficient market, it is important to have rational investors and active arbitragers.

Markets Would Be Inefficient If Irrational Investors __________ and Actions