CFA Practice Question

CFA Practice Question

In an efficient capital market, price adjustments
A. would be imperfect and unbiased.
B. could occasionally be imperfect, but not be subject to arbitrage profits.
C. would always be perfect.
Explanation: In an efficient capital market, price adjustments may be imperfect, but they would be unbiased; the market will sometimes overadjust, and sometimes underadjust, but one would not be able to predict which will occur at any given time, making arbitrage profits impossible.

User Contributed Comments 7

User Comment
keithinny so why is A wrong ??
stefdunk because the market would be perfect most of the time
xjarl Rubbish, there is no such thing as perfection, the market will always over/under adjust even if by a very small amount.

A is clearly correct.
steved333 A is incomplete. Though it is may be true, it suggests that an analyst would be able to determine whether it was over or under adjusting and when at any given point in time. Since the market is constantly fluctuating, this is highly improbable the vast majority of the time, so the answer needs to be qualified as it is in option B.
Kuki right on steved333...
Dinosaur its hard to define something that doesn't exist
mattg I will be so glad when this exam is over tomorrow ... I might cry a little
You need to log in first to add your comment.