In an eﬃcient market, it is believed by some individuals that the actions of traders who constantly buy and sell on any perceived market mispricings will in effect cause market prices to correctly
Reﬂect asset values. A person who believes that the actions of these traders will not result in
Correctly valued prices is most apt to believe in which one of the following?
A) Gambler's fallacy.
B) Limits to arbitrage.
C) Availability bias.
D) False consensus.
E) Clustering illusion.

Question

Quizplus · Accepted Answer

Limits to arbitrage refers to the idea that even if there are mispricings in a market, it may not be possible for traders to consistently profit from them due to various constraints such as transaction costs and limited access to capital. Therefore, in this scenario, someone who does not believe that market prices will correctly reflect asset values despite the actions of traders is likely to subscribe to the concept of limits to arbitrage.

In an Eﬃcient Market, It Is Believed by Some Individuals