Which of the following sources of market inefficiency would be most easily exploited?

multiple choice

1. A stock price drops suddenly due to a large block sale by an institution.

2) A stock is overpriced because traders are restricted from short sales.

3) Stocks are overvalued because investors are exuberant over increased productivity in the economy.

The correct answer is 3 - Stocks are overvalued because investors are exuberant over increased productivity in the economy.

Explanation

If the stocks are overvalued, without regulative restrictions or other constraints on the trading, some investors observing this trend would be able to form a trading strategy to profit from the mispricing, thereby exploiting the inefficiency and forcing the price to the correct level.