Which of the Following Statements Regarding Arbitrage and Security Prices

question 78

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:

Net Present Value Method

A method in capital budgeting that evaluates an investment by calculating the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Present Value

The estimated current value of a forthcoming sum of money or series of cash inflows, considering a certain rate of return.

Method

A systematic way or approach used to accomplish a task or solve a problem, often applied in research, analysis, or strategic planning.

Capital Rationing

A strategy or situation where a company limits its new investments or projects due to constraints on available financial resources.