Which of the Following Statements Regarding Arbitrage and Security Prices

question 75

Multiple Choice

Which of the following statements regarding arbitrage and security prices is incorrect?

• A) We call the price of a security in a normal market the no-arbitrage price for the security.
• B) In financial markets it is possible to sell a security you do not own by doing a short sale.
• C) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds.
• D) The general formula for the no-arbitrage price of a security is Price(security) = PV(All cash flows paid by the security).

---

Definitions:

Prepaid Expenses

Payments made in advance for goods or services, which are recognized as expenses over time as the benefits are received.

Adjusting Entries

Financial records generated at the end of a bookkeeping period to allocate receipts and disbursements to the time in which they actually occurred.

Accrued Expenses

Expenses that have been incurred by a company but not yet paid or recorded in financial statements.

Adjusting Entries

Journal entries made in accounting to update the records for expenses and revenues that have accrued but are not yet recorded.