Suppose That a Security with a Risk-Free Cash Flow of $1000

question 77

Multiple Choice

Suppose that a security with a risk-free cash flow of $1000 in one year trades for $930 today.If there are no arbitrage opportunities,then the current risk-free rate is closest to:

• A)6.0%
• B)6.5%
• C)7.0%
• D)7.5%

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Definitions:

Arbitrage Opportunity

A situation where a trader can profit from differences in price of the same or similar financial instruments on different markets or in different forms.

Risk-free Rate

The theoretical rate of return of an investment with no risk of financial loss, often represented by government bonds.

Diversified Portfolios

Investment portfolios constructed to spread risk across various asset classes or sectors to reduce volatility.

Systematic Factors

External influences that affect all companies in the market to some extent, such as economic, political, and social changes.