Which of the following statements regarding arbitrage and security prices is INCORRECT?
A) We call the price of a security in a normal market the no-arbitrage price for the security.
B) In financial markets it is possible to sell a security you do not own by doing a short sale.
C) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds.
D) The general formula for the no-arbitrage price of a security is Price(security) = PV (all cash flows paid by the security).

Question

Quizplus · Accepted Answer

When a bond is underpriced, the correct arbitrage strategy involves buying the bond (not selling it) and possibly financing this purchase by borrowing or selling other securities, aiming to profit from the bond's price adjustment towards its fair value.

Which of the Following Statements Regarding Arbitrage and Security Prices