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An exchange traded fund (ETF)is a security that represents a portfolio of individual stocks.Consider an ETF for which each share represents a portfolio of two shares of International Business Machines (IBM),three shares of Merck (MRK),and three shares of Citigroup Inc.(C).Suppose the current market price of each individual stock are shown below:
-Suppose that the ETF is trading for $666.95;you should:
A)sell the EFT and buy 2 shares of IBM,3 shares of MRK,and 3 shares of C.
B)sell the EFT and buy 3 shares of IBM,2 shares of MRK,and 3 shares of C.
C)buy the EFT and sell 2 shares of IBM,3 shares of MRK,and 3 shares of C.
D)do nothing,no arbitrage opportunity exists.

Question

Use the information for the question(s)below.
An exchange traded fund (ETF)is a security that represents a portfolio of individual stocks.Consider an ETF for which each share represents a portfolio of two shares of International Business Machines (IBM),three shares of Merck (MRK),and three shares of Citigroup Inc.(C).Suppose the current market price of each individual stock are shown below: 
-Suppose that the ETF is trading for $666.95;you should:
A)sell the EFT and buy 2 shares of IBM,3 shares of MRK,and 3 shares of C. 
B)sell the EFT and buy 3 shares of IBM,2 shares of MRK,and 3 shares of C. 
C)buy the EFT and sell 2 shares of IBM,3 shares of MRK,and 3 shares of C. 
D)do nothing,no arbitrage opportunity exists.

Quizplus · Accepted Answer

Without additional information on the prices of IBM, MRK, and C, or the value of the ETF in relation to these stocks, it's not possible to determine if an arbitrage opportunity exists. Therefore, the safest assumption is that no arbitrage opportunity exists.

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