Which of the following statements are true in context of efficient market?

A. Equilibrium rates of return will prevail

B. Investor cannot earn a positive return

C. Volatility will be very high

D. Securities of listed firms sell at their fair values

E. Investors are generally risk-averse

Choose the most appropriate answer from the options given below:

The correct answer is A, D only.

Key Points A. Equilibrium rates of return will prevail.

• In an efficient market, where all relevant information is available to all participants, the prices of securities reflect their intrinsic values.
• As a result, the market reaches an equilibrium state where the rates of return on investments accurately reflect the level of risk associated with them.
• This means that statement A is true in the context of an efficient market.

D. Securities of listed firms sell at their fair values

• Statement D is also true because in an efficient market, securities of listed firms are expected to be fairly priced, meaning their prices reflect their underlying fundamental values.
• This is because any deviations from fair value would create opportunities for arbitrage and would be quickly exploited by market participants, leading to the adjustment of prices towards fair value.

Additional Information Statements B, C, and E are not necessarily true in the context of an efficient market. Investors can still earn positive returns in an efficient market by identifying and exploiting mispriced securities, although it may be challenging. Volatility can vary in an efficient market depending on various factors, and investors can have varying risk preferences, including risk-averse, risk-neutral, or risk-seeking.