Final answer:
Buying or selling financial securities in an efficient market is a zero NPV investment because financial securities are priced at their true value, the price is determined by discounting expected future cash flows, and the treasury bill rate does not determine the price of all financial securities.
Step-by-step explanation:
In an efficient market, buying or selling financial securities is a zero NPV (Net Present Value) investment for several reasons:
- Financial securities are priced at their true value and investors cannot make excess profit from the transaction: In an efficient market, the price of financial securities reflects all available information and incorporates the expected future cash flows. This means that the price accurately represents the true value of the security, leaving no room for investors to make excess profit from buying or selling.
- The price of a financial security in an efficient market is the present value of the expected future cash flows: The present value of a security's expected future cash flows is determined by discounting those cash flows at an appropriate discount rate. In an efficient market, this discount rate reflects the risk and opportunity cost of investing in the security.
- The price of all financial securities is not determined by the treasury bill rate, which is risk-free: The price of financial securities in an efficient market is influenced by a variety of factors, including interest rates, risk, supply and demand dynamics, and market sentiment. The treasury bill rate may serve as a benchmark or reference rate but does not determine the price of all financial securities.