An investor will take as large a position as possible when an equilibrium price relationship is violated.This is an example of _________.
A)a dominance argument
B)the mean-variance efficiency frontier
C)a risk-free arbitrage
D)the capital asset pricing model
E)none of the above

Question

Quizplus · Accepted Answer

This scenario describes risk-free arbitrage, where an investor takes advantage of a market inefficiency to make a profit without taking on any risk. The violation of the equilibrium price relationship presents an opportunity for the investor to take a large position and make a profit without any possibility of loss. Choice A is not applicable, as dominance arguments pertain to game theory. Choice B pertains to portfolio optimization, and Choice D refers to the pricing of securities based on market risk and expected returns, which is not relevant in this scenario.

An Investor Will Take as Large a Position as Possible