Equal access to perfect financial markets ensures that individual investors can replicate any financial action that the firm can take.

Question

Quizplus · Accepted Answer

In perfect financial markets, where there are no taxes, bankruptcy costs, agency costs, or asymmetric information, all securities are fairly priced, and every investor has equal access to all relevant financial information and trading opportunities. This means individual investors can indeed replicate any financial action that a firm can take, such as creating homemade leverage or mimicking the cash flows of a particular investment, because there are no frictions or barriers that would prevent them from doing so.

Equal Access to Perfect Financial Markets Ensures That Individual Investors