Chapter 7, Problem 4LO

To determine

Why does the arbitrage opportunities imply that the efficient market hypothesis holds.

Concept introduction:

Efficient Market hypothesis- The hypothesis implies the assumption that the markets are “informationally efficient”. The prices of the financial assets are fully reflective of all the publicly available information at any point of time.

Arbitrage- It is the simultaneous purchase and sale of financial assets in different markets or derivative forms to take advantage of and maximize returns due to varying prices for the same asset.