An Investor Owns Bond #1, Which Has a Rate of Return

question 255

Multiple Choice

An investor owns bond #1, which has a rate of return of 10 percent, but a similar bond #2 has an 11 percent return and equal risk. By selling bond #1 and buying bond #2 to earn a higher return, the
Investor is engaging in

• A) pooling.
• B) arbitrage.
• C) diversification.
• D) time preference.

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Definitions:

Simplify

To make an expression less complex by combining like terms and executing arithmetic operations where possible.

Fraction

A numerical quantity that represents a part of a whole, typically in the form of a numerator divided by a denominator.

Exponent

A number that indicates how many times a base is multiplied by itself.

Fraction

A mathematical expression representing the division of one quantity by another, noted by a numerator divided by a denominator.