How long can an arbitrage opportunity of two similar assets last?

Question

Quizplus · Accepted Answer

Arbitrage opportunities arise when two similar assets are priced differently, providing an opportunity for investors to buy the cheaper asset and sell the more expensive one, thus profiting from the price difference. However, as more investors continue to take advantage of the arbitrage opportunity, the demand for the cheaper asset will increase, driving up its price, while the supply of the more expensive asset will increase, driving down its price. This process will continue until the rates of return for the two assets are equal, thereby eliminating the arbitrage opportunity. Therefore, option B is the correct answer as an arbitrage opportunity can only last until the rates of return of the two assets are equal.

How Long Can an Arbitrage Opportunity of Two Similar Assets