Which of the following statements about arbitrage is correct?Select one:O a.A risk averse investor will never arbitrage because of the risk involved.O b.An arbitrage opportunity arises when it is possible to exploit a pricing anomaly to make riskless guaranteed profits.O c.Arbitrage opportunities continue to exist in equilibrium.d.An investor loves to arbitrage because he/she is willing to pay a premium to buy risky assets.

Arbitrage is the position when a person buy some product from one market and sold it in another…

Answered: Which öf the föllowing statements about…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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A Listen An example of the no-arbitrage principle holding would be when all risk-free investments offer investors: A) the same return B) negative returns C) positive returns D) zero return
Why is it reasonable to ignore diversifiable risk and care only about nondiversififiable risk? What about an investor who puts all of his money into only a single risky stock? Can he properly ignore diversififiable risk?
Discuss the following statement about hedging: “There is no such thing as a hedge. Any hedge is an act of taking a position that an adverse market movement will occur. This, itself, is a form of speculation.”
An investor takes as large a position as possible when an equilibrium pricerelationship is violated. This is an example of:A. A dominance argument.B. The mean-variance efficient frontier.C. Arbitrage activity.D. The capital asset pricing model.
Which of the following is correct with regards to Theories of Term Structure? When the shape of the yield curve depends on investors’ expectations about prospective prevailing interest rates, the Pure Exception Theory is being applied. When the economic outlook is improving, the yield curve inverts as it reflects no changes in inflation premium. The liquidity preference theory suggests that long-term rates are generally higher than short-term rates since investors perceive more liquidity in long-term investments. Under the Market segmentation theory, there is an apparent relationship between the yield curve and the prevailing rate of returns in each market segment.
STATEMENT 1: Call options' value go up if the market perceives the underlying asset to be undervalued. STATEMENT 2: Put options' increase in value is parallel to the increase of risk of an investment. Both statements are true Both statements are false Only statement 1 is true Only statement 2 is true
An increase in a firms inclination to pay dividends may be because of a decline in profitable investment opportunities in the future. is this true or false and why. relevant or not, frequent changes in dividend policy can harm a firm. is this true or false and why. what is the essential feature of a forward contract that makes a futures contract a type of forward contract,
One of the basic promises of security analysis, and in particular fundamental analysis is that A- a stock's price is based on the cash flows it has generated in the past B- market sectors and industries do not move in concert with business cycle C- all securities have an intrinsic value that their market value will approach over time D- a security's risk has relatively litthe effect on the security's return
Which one of the following expressions about risk and returns is wrong? A. In general, one reason why a stock is riskier than a bond is that because cash flows from a bond are known and promised, whereas cash flows from a stock are neither known nor promised. B. According to CAPM model, a well-diversified portfolio will have a beta which equals to 0. C. Risk premium is the extra return provided on risky assets to compensate for risk. The difference between risky return and the risk-free return. D. Unexpected return happened because new information came to light which caused our expectations about prices and returns to change.
Risk and Return: Introduction Risk is an important concept affecting security prices and rates of return. Risk is the chance that some unfavorable event will occur, and there is a trade-off between risk and return. The higher an investment's risk, the-Select-the return required to induce investors to purchase the asset. This relationship between risk and return indicates that investors are risk ; investors dislike risk and require -Select- Vrates of return as an inducement to buy riskier securities. A represents the additional compensation investors require for bearing risk; it is the difference betweer the expected rate of return on a given risky asset and that on a less risky asset. An asset's risk can be considered in two ways: On a stand-alone basis and in a portfolio context. -Select- -Select-

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