Assume that there is perfect arbitrage in the stock market. Given this information, economists believe that:
A) the rate of return on stocks will be equal to the rate of return on bonds.
B) most stocks diverge widely from their fundamental value.
C) movements in stock prices are largely unpredictable.
D) stocks will generally earn a lower rate of return than bonds.
E) movements in stock prices can be easily predicted.

Question

Quizplus · Accepted Answer

In a market with perfect arbitrage, all available information is already reflected in stock prices, making it difficult to predict future price movements, leading to the belief that stock price movements are largely unpredictable.

Assume That There Is Perfect Arbitrage in the Stock Market