Question

If a market is efficient, then the difference between the market value of an investment and...

If a market is efficient, then the difference between the market value of an investment and its cost is:

Select one:

a. Positive and greater than 1.

b. Equal to the risk-free rate of return.

c. Equal to the risk premium.

d. Zero.

e. Equal to the net present value of the cash inflows.

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Homework Answers

Answer #1

Option D

Efficient market means a market wherein the current prices reflects the position of the market.

The net present value of an investment is the difference between the market value of an investment and its cost. In an efficient market, the NPV is zero.

This is because, in an efficient market, the information regarding an investment is immediately reflected in its prices. Therefore, there are no chances for an investment to be under-valued or over-valued.

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