The possibility of arbitrage arises when ________.
A) there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily
B) mispricing among securities creates opportunities for riskless profits
C) two identically risky securities carry the same expected returns
D) investors do not diversify

Question

Quizplus · Accepted Answer

Arbitrage opportunities arise when mispricing among securities creates an opportunity for riskless profits. This means that an investor can buy an underpriced security and simultaneously sell an overpriced security, making a profit without taking on any risk. The other choices do not accurately describe the conditions necessary for arbitrage to occur.

The Possibility of Arbitrage Arises When ________