If the financial markets are efficient, then:

• A. Government intervention is always necessary to correct market failures.
• B. Prices of securities fully reflect all available information.
• C. Market prices are determined solely by government policy.
• D. Investors can consistently achieve above-average returns without risk.

Answer: (B)

Verified step by step guidance

1. Understand the concept of efficient financial markets: In an efficient market, prices of securities fully reflect all available information. This means that all known information is already incorporated into the price, making it impossible to consistently achieve above-average returns without taking additional risk.
2. Analyze each statement in the problem: The first statement claims government intervention is always necessary to correct market failures, which is not necessarily true in efficient markets because prices already reflect information efficiently.
3. Evaluate the second statement: 'Prices of securities fully reflect all available information' aligns with the definition of market efficiency, specifically the Efficient Market Hypothesis (EMH).
4. Consider the third statement: 'Market prices are determined solely by government policy' is incorrect because market prices are influenced by supply, demand, and available information, not just government policy.
5. Review the fourth statement: 'Investors can consistently achieve above-average returns without risk' contradicts the EMH, which states that such consistent above-average returns without risk are not possible in an efficient market.