How Does Imperfect Information Affect Market Decisions

question 28

Multiple Choice

How does imperfect information affect market decisions?

• A)It doesn't because information is generally excellent.
• B)It leads to inefficient outcomes in which expected benefits and actual benefits diverge.
• C)It leads to wasteful attempts to improve information.
• D)It leads to exploitation of sellers by buyers.

---

Definitions:

Arbitrage Opportunities

The chance to buy an asset at a low price in one market and simultaneously sell it at a higher price in another market, earning a risk-free profit.

Expected Returns

The average return an investor anticipates on an investment, based on historical data, projected performance, and market analysis.

Factor Portfolio

A well-diversified portfolio constructed to have a beta of 1.0 on one factor and a beta of 0 on any other factor.

Well-Diversified Portfolio

A portfolio that contains a wide variety of investments across multiple asset classes to reduce risk.