Which statement is true?

I. Trading limitations contribute to market efficiency.
II. Arbitrage activities contribute to market efficiency.

Correct Answer: II

Trading limitations impede a market's efficiency. Arbitrage facilitates the determination of prices. The combined actions of many investors engaging in arbitrage result in rapid price adjustments that eliminate any arbitrage opportunities, thereby bringing prices back. It also promotes market efficiency. Arbitrage activities will quickly eliminate arbitrage opportunities available in the market, thereby promoting market efficiency.