Which of the Following Questions Regarding Risk Arbitrage Is FALSE

question 46

Multiple Choice

Which of the following questions regarding risk arbitrage is FALSE?

• A) Once a tender offer is announced, the uncertainty about whether the takeover will succeed reduces the volatility of the stock price. This uncertainty creates an opportunity for investors to speculate on the outcome of the deal without bearing the risk of volatility.
• B) Traders known as risk-arbitrageurs, who believe that they can predict the outcome of a deal, take positions based on their beliefs.
• C) A potential profit arises from the difference between the target's stock price and the implied offer price, and is referred to as the merger-arbitrage spread.
• D) However, it is not a true arbitrage opportunity because there is a risk that the deal will not go through. If the takeover did not ultimately succeed, the risk-arbitrageur would eventually have to unwind his position at whatever market prices prevailed.

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Definitions:

Halo Effect

A cognitive bias where one's overall impression of a person, brand, or product influences one's thoughts and feelings about that entity's character or properties.

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A psychological concept referring to how strongly people believe they have control over the situations and experiences affecting their lives.

Attribution

The process by which individuals explain the causes of behavior and events, attributing them to internal dispositions or external situations.

Perceptual Activities

are processes through which individuals interpret and make sense of their sensory input from the environment.