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).

---

Definitions:

Damages

Compensation claimed by or ordered to be paid to a party for loss or injury as a result of breach of contract, negligence, or other wrongful act.

Criminal Injuries

Criminal injuries refer to physical or psychological harm suffered as a direct result of a criminal act.

Civil Injuries

Acts that cause harm or damage to another person in private matters, leading to civil litigation.

Respondeat Superior

A legal doctrine that holds employers legally responsible for the actions of their employees performed in the course of employment.