Markets tend to be efficient when
A)arbitrage is unlawful.
B)amateurs dominate the market.
C)all investors are required to be rational.
D)professional arbitrage exceeds amateur speculation.
E)prices adjust to new information slowly.

Question

Quizplus · Accepted Answer

Professional arbitrageurs are typically knowledgeable and experienced in identifying mispricings in the market and can exploit these mispricings for profit. When professional arbitrage exceeds amateur speculation, market efficiency increases as prices are more likely to reflect all available information. In contrast, if amateurs dominate the market, prices may be more prone to being influenced by sentiment and may not accurately reflect underlying fundamentals. Therefore, option D is the best choice as it suggests that markets tend to be efficient when professional arbitrageurs are more active than amateur speculators.

Markets Tend to Be Efficient When