In the context of market efficiency, the market is...[Fill in the blank]

Question

BlackTom AI · Accepted Answer

Informational efficiency means security prices fully and immediately reflect all available information, so no investor can earn abnormal profits from information advantage when information is costless and all investors are rational and receive that information at the same time.

1) Relevant concepts:
- Forms of market efficiency (Fama): weak (prices reflect past price/volume data), semi-strong (prices reflect all publicly available information), strong (prices reflect all information, public and private).
- Assumptions often used in theoretical informational efficiency: information is costless to acquire, investors process information rationally, and information is available simultaneously to market participants.
- Distinction between informational efficiency and allocative/transactional descriptions (e.g., low transaction costs or optimal capital allocation are related but different concepts).

2) Step‑by‑step reasoning:
- Compare each option to the textbook definitions.
  - Option c states the market is “informationally efficient when information is costless, and all investors are rational and receive information simultaneously.” This matches the theoretical ideal of informational efficiency: with costless, simultaneous information and rational actors, prices incorporate information instantly so abnormal profits from information cannot persist.
  - Option a ties “strong form” to absence of transaction costs. Strong form pertains to private (insider) information being reflected in prices, not transaction costs; transaction costs affect trading friction, not the definition of strong‑form informational content.
  - Option b links “semi‑strong form” to savings allocation and cost of capital equaling marginal rate of risk‑adjusted return. That describes allocative efficiency or capital market equilibrium outcomes, not the semi‑strong definition (which concerns prices reflecting publicly available info).
  - Option d (“None”) is wrong because option c correctly states the informational efficiency condition.

3) Why c is correct:
- It captures the key theoretical assumptions required for prices to fully reflect information (costless acquisition, rational processing, simultaneous receipt). This is precisely the ideal informational efficiency condition.

Conclusion: The correct answer is c. This explanation confirms and supports the provided answer.

In the context of market efficiency, the market is...[Fill in the blank]Single choice

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