An investor owns bond #1, which has a rate of return of 10 percent, but a similar bond #2 has an 11 percent return and equal risk.By selling bond #1 and buying bond #2 to earn a higher return, the investor is engaging in
A)pooling.
B)arbitrage.
C)diversification.
D)time preference.

Question

Quizplus · Accepted Answer

Arbitrage is the act of buying and selling the same asset in different markets to take advantage of price discrepancies. In this case, the investor is selling bond #1 and buying bond #2 to take advantage of the higher return on bond #2.

An Investor Owns Bond #1, Which Has a Rate of Return