Arbitrage is the process by which investors simultaneously sell
A) assets with higher rates of return and buy otherwise identical assets with lower rates of return.
B) assets with lower rates of return and buy otherwise identical assets with higher rates of return.
C) riskier assets and buy less risky assets.
D) less risky assets and buy riskier assets.

Question

Quizplus · Accepted Answer

Arbitrage involves taking advantage of price discrepancies between two similar assets. By selling the asset with a lower rate of return and buying the asset with a higher rate of return, investors can aim to make a profit from the difference in price. This is the opposite of option A, where investors would effectively be selling the more valuable asset and buying the less valuable one, which would result in a loss. Options C and D are not necessarily accurate as the riskiness of an asset does not necessarily relate to its rate of return.

Arbitrage Is the Process by Which Investors Simultaneously Sell