Suppose that a significant fraction of the population of investors needs to buy a security, say a
stock ABC, for reasons unrelated to the stock’s fundamentals (its expected future earnings and
dividends). For instance, suppose that an important stock market index suddenly gives a large
weight to stock ABC.
(a). What will happen to the stock price in a perfectly efficient market?
(b). What is likely to happen to the stock price in a market with limited arbitrage?
(c). In an efficiently inefficient market, where the stock price moves (as discussed in part b.), what
is likely to happen to the price of another stock that is highly correlated to stock ABC (but
not directly affected by the demand pressure)?