Arbitrage occurs when

Question

Quizplus · Accepted Answer

Arbitrage refers to the practice of buying and selling assets in different markets, or at different times, in order to make a profit from price discrepancies. In this case, investors are seeking to profit from selling a lower rate of return asset (e.g. a bond) to buy one that is nearly identical but with a higher rate of return (e.g. a higher-yielding bond or stock). Choice A is incorrect because bond and stock rates of return do not need to be equal for arbitrage to occur. Choice C is incorrect because rates of return only need to equalize for the specific assets being traded, not across all stocks. Choice D is also incorrect as investors typically focus on comparability when making investment decisions rather than solely moving from lower to higher rate of return assets.

Arbitrage Occurs When