Which of the Following Is an Example of an Arbitrage

question 7

Multiple Choice

Which of the following is an example of an arbitrage opportunity?

• A)You can play a game in which you will win $100,000 if you draw any card but an ace out of a 52-card deck. If you draw an ace, however, you pay only $1.00.
• B)You have found an investment that is guaranteed to offer you a 100% return on your investment in one year.
• C)You are able to borrow money today for one year at 3% and simultaneously invest the proceeds in a project that is guaranteed to return 15% at the end of the year. There are no
• Transaction costs associated with either the loan or the investment.
• D)None of the above is an arbitrage opportunity.

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Definitions:

Capital Gains

The profit that results from the sale of a capital asset, such as stock, bond, or real estate, where the sale price exceeds the purchase price.

Contributed Capital

Funds raised by a company through the issuance of shares, representing the capital that shareholders have invested in the company.

Defined Benefit Pension Plan

A retirement plan where an employer promises a specified pension payment upon retirement, based on the employee's earnings history, tenure of service, and age.

Retired Employees

Individuals who have ended their professional career and are no longer working, often receiving pensions or living off retirement savings.