Assume that two ﬁrms (Firm A and Firm B) are similar in all respects, but Firm A's stock has a higher rate of return than Firm B's stock. Arbitrage will occur as investors
A) sell Firm A's stock and buy Firm B's stock.
B) buy Firm A's stock and buy Firm B's stock also.
C) sell Firm A's stock and sell Firm B's stock also.
D) buy Firm A's stock and sell Firm B's stock.

Question

Quizplus · Accepted Answer

Investors will buy Firm A's stock with higher return and sell Firm B's stock with lower return to make a profit from the difference. This is known as arbitrage. Therefore, the best choice is to buy Firm A's stock and sell Firm B's stock.

Assume That Two ﬁRms (Firm a and Firm B) Are