Asked by keriesha smith on May 30, 2024
Verified
Arbitrage is based on the idea that ________.
A) assets with identical risks must have the same expected rate of return
B) securities with similar risk should sell at different prices
C) the expected returns from equally risky assets are different
D) markets are perfectly efficient
Arbitrage
The practice of profiting from price differences of the same asset in different markets, exploiting inefficiencies without market risk by simultaneously buying and selling.
Expected Rate of Return
The mean amount of profit or loss one can expect from an investment, accounting for all possible outcomes.
- Understand the concept of arbitrage and its role in ensuring market efficiency.
Verified Answer
RE
Robert ElkindJun 06, 2024
Final Answer :
A
Explanation :
Arbitrage is the process of exploiting differences in the price of an asset in different markets to make a profit with no net cash flow. This idea is based on the principle that assets with identical risks must have the same expected rate of return. If there is any difference in expected returns, investors could buy the asset with the lower expected return and sell short the asset with the higher expected return. This would lead to an arbitrage opportunity, which would ultimately remove the price differential and restore equilibrium to the market.
Learning Objectives
- Understand the concept of arbitrage and its role in ensuring market efficiency.
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