问

问题如下：

Arbitrage activity will most likely be higher in securities markets:

选项：

A.with no restrictions on short selling. B.that are efficient. C.with high information acquisition costs.

解释：

Solution

1. Correct. Short selling helps in price discovery. Arbitrageurs benefit from pricing discrepancies (inefficiencies); therefore, arbitrage activity will be higher in markets with no restrictions on short selling.

2. Incorrect. In an efficient market security prices tend to be closely aligned with the intrinsic values. Thus, arbitrage activity will be less in markets that are efficient.

3. Incorrect. High trading costs (transaction costs and information-acquisition costs) would negatively impact the potential profits thereby impeding the arbitrage activity.

Market Efficiency

• describe market efficiency and related concepts, including their importance to investment practitioners