Consider Two Securities,A & B

question 86

Multiple Choice

Consider two securities,A & B.Suppose a third security,C,has the same cash flows as A and B combined.Given this information about securities A,B,& C,which of the following statements is INCORRECT?

• A)If the total price of A and B is cheaper than the price of C,then we could make a profit selling A and B and buying C.
• B)Price(C)= Price(A)+ Price(B).
• C)Because security C is equivalent to the portfolio of A and B,by the law of one price they must have the same price.
• D)The relationship known as value additivity says that the value of a portfolio is equal to the sum of the values of its parts.

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Definitions:

Ordinary Annuity

Uniform compensation packages delivered upon concluding every phase over a defined schedule.

Periodic Payment

A recurring payment made over a set interval of time, such as monthly or annually, often associated with loans or investments.

Ordinary Annuity

Like payments executed after every period close throughout an agreed length.

Periodic Payment

Recurrent payments made at regular intervals over a period of time, such as monthly mortgage or rent payments.