Which of the Following Statements Regarding Arbitrage and Security Prices

question 78

Multiple Choice

Which of the following statements regarding arbitrage and security prices is INCORRECT?

• A)We call the price of a security in a normal market the no-arbitrage price for the security.
• B)In financial markets it is possible to sell a security you do not own by doing a short sale.
• C)When a bond is underpriced,the arbitrage strategy involves selling the bond and investing some of the proceeds.
• D)The general formula for the no-arbitrage price of a security is Price(security)= PV (All cash flows paid by the security).

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Definitions:

Marginal Tax Rate

The percentage of tax levied on the last dollar of an income earner's taxable income, reflecting the tax applied to each income level for which the taxpayer is eligible.

After-Tax Cost

The net cost of an investment or financing after taking into account the effects of taxation.

Dividend Growth

Refers to the year-over-year increase in dividends paid out by a company, indicating its ability to generate increasing profits over time.

Gordon Model

A model used to determine the value of a stock by assuming a dividend grows at a constant rate indefinitely.