CFA Practice Question

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CFA Practice Question

A large number of competing investors is necessary for market efficiency because ______

I. it creates independent and random price changes.
II. it results in faster price adjustment.
III. information is more fully examined and acted upon.
A. I and II
B. II and III
C. I, II and III
Explanation: Markets become efficient due to a high degree of competition in the markets. Competition is higher with more participants, who examine and act on new information. Also, a higher level of competition will result in faster decisions and therefore faster price adjustment.

User Contributed Comments 9

User Comment
andrewsutton Why is i. necessary?
szyrmer Why are they random movements?
mtcfa If they were not random, then price movements would be predictable based on past movements. This is in violation of all forms of the EMH.
Kuki good point mtcfa!
jhuanghuy But why do more investors cause random price movements?
bluejazzy1 rational and irrational expectations
petervinh18 more investors more purchases/sells, so the price movements will effective.
jnptrsn1 Theyre not random, they just seem to be from anyones perspective because noone has access to all the reasons different trades are made.
kken1988 But it is precisely because that it is not random and all the past transaction data are encapsulated in the price that technical analysis is not useful for a weak EMH?
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