What is an arbitrage opportunity? Discuss using an example (of your choice) and explain how an investor may exploit it to make (infinitely) large profits
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What is an arbitrage opportunity? Discuss using an example (of your choice) and explain how an investor may exploit it to make (infinitely) large profits
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Solved in 3 steps
- The objective function of an investor in a CAPM world is to what (mathematically) [what are your trying to maximize]? What is the major assumption about the distribution of returns that we have to make to get to this objective function?This problem, like the first one, is a brain teaser. If a market is efficient, how is it possible for an investor to earn a profit?How is it possible to have arbitrage in an efficient market? Explain.Answer :
- Why have ETFs grown to become one of the most popular investment products? What are some of the risks that may be associated with ETFs.Suppose that the price of an asset equals its fundamentalvalue. What behavioral features might then ensure that investors continue totrade? Answer this question specifically in the context of the models that havebeen taught in your course.What is market efficiency? How do we characterise efficiency in financial markets? Briefly explain each type of efficiency and describe any empirical evidence that supports it.
- What type of security can be used to minimize both price risk and reinvestment riskfor an investor with a fixed investment horizon? Does this security protect the realpayoff? Explain.Why is there an arbitrage opportunity and how does the arbitrage portfolio work? Thanks for your helpWhat is an arbitrage opportunity? Explain very briefly.