Use the Information for the Question(s) Below

question 72

Multiple Choice

Use the information for the question(s) below.
An exchange traded fund (ETF) is a security that represents a portfolio of individual stocks. Consider an ETF for which each share represents a portfolio of two shares of International Business Machines (IBM) , three shares of Merck (MRK) , and three shares of Citigroup Inc. (C) . Suppose the current market price of each individual stock are shown below:

-Suppose that the ETF is trading for $424.50; you should

• A) sell the ETF and buy 2 shares of IBM, 3 shares of MRK, and 3 shares of C.
• B) sell the ETF and buy 3 shares of IBM, 2 shares of MRK, and 3 shares of C.
• C) buy the ETF and sell 2 shares of IBM, 3 shares of MRK, and 3 shares of C.
• D) do nothing, no arbitrage opportunity exists.

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Definitions:

Changing Expected Returns

The alteration in the anticipated returns on an investment due to changes in market conditions, company performance, or other factors.

Dynamic Hedging

A strategy that involves adjusting the hedge position dynamically as market conditions change, used to manage risk in trading portfolios.

Static Hedging

A financial strategy that involves setting up a position in options or other securities to mitigate risk, without needing to adjust the position frequently.

Capital Outlay

The amount of money spent on acquiring or improving fixed assets, such as buildings, equipment, and land.