A characteristic of an efficient market is that
A) prices are equal for all securities.
B) bid-asked spreads are large.
C) prices reflect all available information.
D) all investors receive a positive rate of return.

Question

Quizplus · Accepted Answer

One of the defining characteristics of an efficient market is that prices reflect all available information. In an efficient market, all publicly available information, including past prices, financial statements, news releases, and other relevant data, is already incorporated into securities prices. This means that investors cannot consistently earn positive returns by trading on this information because the information is already reflected in the prices. Therefore, an efficient market implies that prices are accurate and unbiased estimates of the true value of securities. Option A is incorrect because prices do differ for different securities depending on their fundamentals and risk profiles. Option B is incorrect as large bid-asked spreads would indicate an illiquid market, which is not efficient. Option D is incorrect as investors may not always receive positive returns in an efficient market, but their expected returns will be fair and consistent with the level of risk they are assuming.

A Characteristic of an Efficient Market Is That