Market Efficiency

C

Market efficiency does not assume that market participants correctly adjust prices, just that their price adjustments are unbiased.

Market efficiency is a concept that refers to the degree to which stock prices reflect all available information. It suggests that in an efficient market, securities are fairly priced, and it is difficult for investors to consistently outperform the market based on publicly available information.

To answer the question, we need to identify the assumption that is NOT related to market efficiency. Let's go through each answer choice:

A. A large number of profit maximizing participants are analyzing securities independently. This assumption is consistent with market efficiency. In an efficient market, there are numerous participants, such as individual investors, institutional investors, analysts, and traders, who analyze securities to maximize their profits. Their independent analyses help to ensure that market prices incorporate the available information.

C. Market participants always correctly adjust prices when new information is received. This assumption is also consistent with market efficiency. In an efficient market, participants quickly and accurately incorporate new information into security prices. If market participants consistently fail to adjust prices correctly, it would imply that the market is inefficient because it would offer opportunities for some investors to earn excess returns.

D. The expected returns implicitly include risk in the price of a security. This assumption is also consistent with market efficiency. In an efficient market, investors incorporate the level of risk associated with a security into its price. If expected returns did not include risk, it would imply that the market is not fully pricing in the risk associated with securities, suggesting a potential inefficiency.

B. All of these choices are correct. This answer choice suggests that all of the assumptions mentioned in options A, C, and D are consistent with market efficiency. If this is the correct answer, it would imply that all of the assumptions are related to market efficiency, leaving no assumption that is NOT based on market efficiency. However, based on the previous analysis, we have found that all the answer choices so far (A, C, and D) are consistent with market efficiency.

Therefore, the correct answer is B. All of these choices are correct. This implies that all the assumptions mentioned in options A, C, and D are based on market efficiency.