An arbitrage opportunity is any situation in which
A) Your estimated probability of a stock appreciating in price is three times that of the stock falling in price, and you hold a long position in the stock.
B) An insider trading on privileged information is able to make supernormal profits.
C) You are able to generate superior risk-adjusted returns to the market.
D) You can construct a strategy whose cash flows are non-negative at all times with at least one positive cash flow at one or more points in time.

Question

Quizplus · Accepted Answer

An arbitrage opportunity occurs when an investor can earn a riskless profit from a market inefficiency. Choice D describes the necessary condition of a strategy with non-negative cash flows that offers a positive cash flow at certain times, indicating an arbitrage opportunity. Choices A and C describe situations where an investor may generate superior returns, but not necessarily through arbitrage. Choice B describes illegal insider trading and does not describe an arbitrage opportunity.

An Arbitrage Opportunity Is Any Situation in Which