CFA Level I · CFA Level I Exam · Equity Issuance and Trading
Which factor would most likely make a market less informationally efficient?
Short-selling restrictions and high arbitrage costs most reduce efficiency. They prevent informed traders from trading against mispricing, especially overpricing, so prices can deviate from intrinsic value for longer. Low costs, many analysts and fast disclosure all help prices incorporate information quickly.
- ALow transaction costs and many active analysts
- BShort-selling restrictions and high costs of arbitrageCorrect
- CRapid dissemination of company disclosures to investors
Explanation
Efficiency relies on informed traders being able to trade and arbitrage away mispricing. Short-selling limits and costly arbitrage prevent correcting overpricing, so prices can stay away from value. The other two factors promote efficiency.
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