Douglas Morin is discussing market efficiency with some college students who are visiting his firm. Morin states that market efficiency would increase if the cost of trading decreases, if the cost of information decreases, and if arbitrageurs had less capital. Morin is least likely to be correct in his opinion about:
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A. B. C.Explanation
Morin's statement suggests that market efficiency would increase under three conditions: a decrease in the cost of trading, a decrease in the cost of information, and a reduction in the capital available to arbitrageurs. We need to identify which statement is least likely to be correct according to Morin's opinion.
Let's evaluate each statement:
A. The cost of trading: Morin suggests that if the cost of trading decreases, market efficiency would increase. This statement aligns with economic theory. Lower trading costs would encourage more participants to enter the market, increasing liquidity and reducing bid-ask spreads. As a result, market prices would more accurately reflect all available information, leading to increased efficiency. Therefore, Morin is likely to be correct in his opinion about the cost of trading.
B. The cost of information: Morin states that if the cost of information decreases, market efficiency would increase. This statement also has merit. When information is more readily available and affordable, market participants can make better-informed decisions, leading to a more efficient market. With lower information costs, investors can access and analyze information more easily, which can improve price accuracy and reduce information asymmetry. Thus, Morin is likely to be correct in his opinion about the cost of information.
C. Arbitrageurs: Morin suggests that if arbitrageurs had less capital, market efficiency would increase. However, this statement is least likely to be correct according to Morin's opinion. Arbitrageurs play a vital role in market efficiency by exploiting mispricing and aligning prices across different markets. Their actions help eliminate discrepancies and ensure that prices reflect fundamental values. If arbitrageurs had less capital, their ability to execute trades and correct mispriced assets would be limited. This could potentially result in market inefficiencies persisting for longer periods. Therefore, Morin's opinion about the impact of arbitrageurs having less capital is less likely to be correct.
In conclusion, Morin's opinion about the impact of arbitrageurs having less capital is least likely to be correct according to the principles of market efficiency.