If the yield on mortgage-backed securities was abnormally high compared to Treasury bonds, a hedge fund pursuing a relative value strategy would

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A hedge fund pursuing a relative value strategy would look for discrepancies in securities that are related to each other, such as mortgage-backed securities and Treasury bonds. If the yield on mortgage-backed securities was abnormally high compared to Treasury bonds, it suggests that the market has undervalued mortgage-backed securities. Therefore, the hedge fund would buy the undervalued mortgage-backed securities and short sell the overvalued Treasury bonds to potentially profit from the spread between the two. Option A and D are not correct because short selling both securities would not take advantage of the discrepancy between the two, and buying both securities (Option C) would not benefit the hedge fund if one security is overvalued.

If the Yield on Mortgage-Backed Securities Was Abnormally High Compared