Arbitrage activities will make the price of the asset with the higher initial return increase, while the
price of the asset with the lower return will decrease.

Question

Quizplus · Accepted Answer

This is because arbitrageurs will buy the asset with the lower return and sell the asset with the higher initial return until the prices of the two assets reach equilibrium. This buying pressure on the lower return asset and selling pressure on the higher return asset will cause their prices to move in opposite directions.

Arbitrage Activities Will Make the Price of the Asset with the Higher