Explain Why a Low-Priced,low Trading Volume Stock Is More Apt

question 11

Essay

Explain why a low-priced,low trading volume stock is more apt to present limits to arbitrage than is a high-priced,high trading volume stock.

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Definitions:

Internal Rate of Return

A financial metric used to estimate the profitability of potential investments by calculating the rate of return at which the net present value of costs (cash outflows) equals the net present value of benefits (cash inflows).

Average Rate of Return

A financial ratio used to measure the profitability of an investment, calculated as the average annual profit divided by the initial investment cost.

Cash Payback Period

The time period required for the cash inflows from a capital investment project to cover the initial cash outlay.

Net Cash Inflow

The surplus of cash revenues over cash expenses in a given period, indicating the liquidity added to an entity.