Information asymmetry

One side of a transaction knowing much more than the other. A client who cannot judge the quality of advice has to rely on the adviser's standards instead of checking.

Where you will meet it

Information asymmetry appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Explain the ways a profession earns public trust and why investment managers must hold themselves to strict ethics
  CFA Level I · Ethical and Professional Standards

  “Investment management needs especially high standards because of that information asymmetry.”

• Set out the Modigliani-Miller propositions and what they imply for the financing mix
  CFA Level I · Corporate Issuers

  “Modigliani and Miller showed that, in perfect markets with no taxes, bankruptcy costs or information asymmetry, capital structure does not affect value.”

• Distinguish private investments from listed ones by their features, and explain how the two kinds of market differ in character
  CFA Level III · Private Markets Pathway

  “Private markets are negotiated one deal at a time, less efficient, and rely on information asymmetry and the manager's ability to source deals.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with I · Glossary