How is market efficiency defined?

Market efficiency is defined as a condition where asset prices incorporate all available information. This concept is pivotal in financial economics and is rooted in the Efficient Market Hypothesis (EMH), which posits that it is impossible to consistently achieve higher returns than average market returns on a risk-adjusted basis, given that all relevant information is already reflected in stock prices.

When a market is efficient, prices move in reaction to new information very quickly and fully, making it challenging for investors to exploit mispriced assets for profit. This understanding is essential for investment management as it informs investment strategies and risk assessment.

Option A suggests a scenario that is unrealistic in efficient markets; investments do not guarantee returns since risk and return are inherently related. Option C's focus on regulatory frameworks does not capture the essence of market efficiency, which is more about information dissemination rather than rules. Lastly, while high trading volumes can indicate market activity, they do not necessarily correlate with efficiency since volume alone does not reflect how well information is incorporated into prices. Hence, the correct option accurately encapsulates the core principle of market efficiency.