Which of the Following Statements Regarding Arbitrage and Security Prices

question 57

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).

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Definitions:

Control Group

A group in an experiment that does not receive the experimental treatment and is used as a benchmark to measure how the other tested subjects do.

Random Sample

A selection process where each member of a population has an equal chance of being included in the sample, minimizing bias.

Population

In statistics and demography, a comprehensive group of individuals or items that share one or more characteristics from which data can be gathered and analyzed.

Double-blind Study

A study design in which neither the participants nor the researchers know which participants belong to the control group and which belong to the experimental group until the conclusion of the research.