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:

Cov(x,y)

The covariance between two variables X and Y, measuring how changes in one variable are associated with changes in a second variable.

Interquartile Range

A measure of statistical variability, defined as the difference between the third and first quartiles of a data set, indicating the spread of the middle 50% of the data.

Test Scores

The numerical outcomes or results obtained from administering educational or psychological tests to evaluate skills, knowledge, or abilities.

Quartiles

Values that divide a set of data into four equal parts, each representing a 25% interval.