Consider two securities,A & B.Suppose a third security,C,has the same cash flows as A and B combined.Given this information about securities A,B,& C,which of the following statements is incorrect?
A) If the total price of A and B is cheaper than the price of C, then we could make a profit selling A and B and buying C.
B) Price(C) = Price(A) + Price(B)
C) Because security C is equivalent to the portfolio of A and B, by the law of one price they must have the same price.
D) The relationship known as value additivity says that the value of a portfolio is equal to the sum of the values of its parts.

Question

Quizplus · Accepted Answer

This statement is incorrect because if the total price of A and B is cheaper than the price of C, then it would not be possible to make a profit by selling A and B and buying C. In fact, it would be the opposite - selling C and buying A and B would result in a profit. The correct statement would be: If the total price of A and B is more expensive than the price of C, then we could make a profit selling C and buying A and B.

B) Price(C) = Price(A) + Price(B) is correct as security C has the same cash flows as A and B combined.

C) The statement is correct because of the law of one price - identical assets must have the same price.

D) The statement is correct because value additivity states that the value of a portfolio is equal to the sum of the values of its parts.

Consider Two Securities,A & B