A market is considered complete if
A)there are more number of states of nature than there are securities
B)there are fewer number of states of nature than there are securities
C)there are as many securities as there are states of nature
D)it is frictionless
E)both b and d.

Question

Quizplus · Accepted Answer

A complete market is one in which there are as many securities as there are states of nature. This means that investors can construct a portfolio that perfectly hedges against any possible outcome, and there are no opportunities for arbitrage. The number of states of nature being less than the number of securities (option B) or a frictionless market (option D) do not necessarily determine completeness. Option A is incorrect because having more states of nature than securities would mean that there are some outcomes that cannot be hedged, while option E is a combination of incorrect choices.

A Market Is Considered Complete If