To take advantage of an arbitrage opportunity, an investor wouldI) construct a zero-investment portfolio that will yield a sure profit.II) construct a zero-beta-investment portfolio that will yield a sure profit.III) make simultaneous trades in two markets without any net investment.IV) short sell the asset in the low-priced market and buy it in the high-priced market.
A) I and IV
B) I and III
C) II and III
D) I, III, and IV
E) II, III, and IV

Question

Quizplus · Accepted Answer

Arbitrage involves taking advantage of price differences in different markets or forms to make a risk-free profit. Option I is correct because arbitrage often involves creating a portfolio that requires no net investment (zero investment) but yields a profit due to price discrepancies. Option III is also correct because arbitrage typically involves making simultaneous trades in different markets to exploit price differences without needing a net investment. Options II and IV are not accurate descriptions of arbitrage strategies. Option II is incorrect because the focus on a zero-beta portfolio is not a requirement for arbitrage. Option IV is incorrect because it describes a simple buy low, sell high strategy, but arbitrage specifically involves simultaneous transactions to lock in a risk-free profit, not just a general strategy of buying in one market to sell in another.

To Take Advantage of an Arbitrage Opportunity, an Investor WouldI)