Question $1(10$ points$)$

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Your finance professor asserts that the bid$-$ask spread is greater in the markets for physical goods like shoes than in financial markets. Which of these statements is valid?

Her statement is more likely to be true because physical inventory costs are greater in the market for shoes than in financial markets.

Her statement is less likely to be true because information about supply and demand for goods changes more slowly and hence price risks are lower for the dealer.

Her statement is less likely to be true because a dealer in shoes will find it easier to recognize when a customer has better information and is trying to buy$/$sell from him at too low$/$too high a price.

Financial assets tend to be more homogenous and so financial markets are more liquid, allowing bid$-$ask spreads to be lower.