Which of the following assumptions is least likely to be consistent with the concept of efficient capital markets?
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A. B. C.B
In the context of efficient capital markets, let's analyze each answer choice to determine which assumption is least likely to be consistent with this concept:
A. Expected returns implicitly include risk in the price of the security. This assumption aligns with the concept of efficient capital markets. In efficient markets, investors are assumed to incorporate all available information, including the associated risks, into the prices of securities. Therefore, this assumption is consistent with the concept of efficient capital markets.
B. Market participants correctly adjust prices based on new information. This assumption is a fundamental aspect of efficient capital markets. In efficient markets, investors are assumed to react quickly and accurately to new information by adjusting security prices accordingly. This assumption facilitates the rapid incorporation of information into security prices, which is a characteristic of efficient capital markets.
C. New information about securities comes to the market in a random fashion. This assumption is also consistent with the concept of efficient capital markets. In efficient markets, new information is assumed to arrive in a random and unpredictable manner. This randomness ensures that no single market participant has an unfair advantage in accessing or acting upon the information before others. Therefore, this assumption supports the notion of efficient capital markets.
Based on the analysis of the three options, it appears that all of the assumptions are generally consistent with the concept of efficient capital markets. However, if we consider the context of the question and identify the least likely assumption, it would be option C. While random arrival of new information is a characteristic of efficient markets, it is not the only possible scenario. In reality, new information may not always come to the market in a completely random fashion. There could be instances where certain market participants have privileged access to information or where information is leaked or manipulated, thus deviating from the strict randomness assumption. Nonetheless, it's important to note that the concept of efficient capital markets still holds even if the arrival of new information is not perfectly random.