If the financial markets are efficient,then investors should expect their investments in those markets to:
A)earn extraordinary returns on a routine basis.
B)generally have positive net present values.
C)generally have zero net present values.
D)produce arbitrage opportunities on a routine basis.
E)produce negative returns on a routine basis.

Question

Quizplus · Accepted Answer

If financial markets are efficient, then all available information is already reflected in the current prices of assets. Therefore, investors should expect to earn a fair rate of return that compensates for the level of risk they are taking, but no more than that. This means that the net present value of their investments should be close to zero, accounting for the cost of capital. A positive net present value would imply that the investor found a mispriced asset, which contradicts the assumption of market efficiency. Similarly, negative returns would imply that the investor systematically made losses, which is unlikely in an efficient market. Finally, arbitrage opportunities would be exploited by investors until they disappear, and should not occur on a routine basis.

If the Financial Markets Are Efficient,then Investors Should Expect Their