An investor seeks to explore the possibility of forming an arbitrage portfolio in order to increase
A) the expected return without increasing risk
B) the expected return with increasing risk
C) the expected return
D) the expected risk

Question

Quizplus · Accepted Answer

The primary purpose of forming an arbitrage portfolio is to increase the expected return without increasing the risk. Arbitrage opportunities arise when there is a discrepancy in prices of similar assets in different markets, and an investor can profit by buying the underpriced asset and selling the overpriced asset. This can be done with little or no risk since the investor is simultaneously buying and selling assets with similar characteristics. Therefore, the correct answer is A) the expected return without increasing risk.

An Investor Seeks to Explore the Possibility of Forming an Arbitrage