Among the important characteristics of market efficiency is (are) that:
I. There are no arbitrage opportunities.
II. Security prices react quickly to new information.
III. Active trading strategies will not consistently outperform passive strategies.
A) I only
B) II only
C) I and III only
D) I, II, and III

Question

Quizplus · Accepted Answer

All three characteristics are important in defining market efficiency. If there were arbitrage opportunities (I), it would mean that investors could make riskless profits by exploiting market inefficiencies. If security prices did not react quickly to new information (II), then some investors would have an advantage over others by trading on information before it becomes fully reflected in security prices. And if active trading strategies could consistently outperform passive strategies (III), then it would mean that not all investor knowledge is already reflected in security prices, and that the market is not efficient.

Among the Important Characteristics of Market Efficiency Is (Are) That