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An exchange traded fund (ETF) is a security that represents a portfolio of individual stocks. Consider an ETF for which each share represents a portfolio of two shares of International Business Machines (IBM), three shares of Merck (MRK), and three shares of Citigroup Inc. (C). Suppose the current market price of each individual stock are shown below:

-Suppose that the ETF is trading for $424.50; you should
A) sell the ETF and buy 2 shares of IBM, 3 shares of MRK, and 3 shares of C.
B) sell the ETF and buy 3 shares of IBM, 2 shares of MRK, and 3 shares of C.
C) buy the ETF and sell 2 shares of IBM, 3 shares of MRK, and 3 shares of C.
D) do nothing, no arbitrage opportunity exists.

Question

Use the information for the question(s) below.
An exchange traded fund (ETF) is a security that represents a portfolio of individual stocks. Consider an ETF for which each share represents a portfolio of two shares of International Business Machines (IBM), three shares of Merck (MRK), and three shares of Citigroup Inc. (C). Suppose the current market price of each individual stock are shown below:
 
-Suppose that the ETF is trading for $424.50; you should
A) sell the ETF and buy 2 shares of IBM, 3 shares of MRK, and 3 shares of C. 
B) sell the ETF and buy 3 shares of IBM, 2 shares of MRK, and 3 shares of C. 
C) buy the ETF and sell 2 shares of IBM, 3 shares of MRK, and 3 shares of C. 
D) do nothing, no arbitrage opportunity exists.

Quizplus · Accepted Answer

D) Value of ETF = 2 × 79.50 + 3 × 40.00 + 3 × 48.50 = $424.50, so no arbitrage opportunity exists

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