Which of the following statements best describes a marginal investor?

• A. An investor whose actions determine the current market price by being willing to buy or sell at that price.
• B. An investor who holds a diversified portfolio and never trades based on market changes.
• C. An investor who only invests in risk-free assets and avoids all market fluctuations.
• D. An investor who always follows the majority and invests only in popular stocks.

Answer: (A)

Verified step by step guidance

1. Understand the concept of a marginal investor in microeconomics and finance: this is the investor whose buying or selling decisions directly influence the current market price of an asset.
2. Recognize that the marginal investor is willing to trade at the prevailing market price, meaning their actions set the equilibrium price where supply meets demand.
3. Compare the given options by evaluating which description aligns with the marginal investor's role in price determination.
4. Eliminate options that describe investors who do not actively influence market prices, such as those who never trade, only invest in risk-free assets, or follow the majority without impacting prices.
5. Conclude that the best description is the investor whose willingness to buy or sell at the current price determines the market price, as this matches the definition of a marginal investor.