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

Question

Quizplus · Accepted Answer

If there is perfect arbitrage in the stock market, then any discrepancies in stock prices would be quickly corrected by arbitrageurs buying low and selling high, which would make movements in stock prices largely unpredictable. Additionally, the presence of perfect arbitrage would also mean that all stocks are priced at their fundamental value, so choice C is incorrect. The answer cannot be D or E as they are unrelated to the assumption of perfect arbitrage in the stock market.

For This Question,assume That There Is Perfect Arbitrage in the Stock