________ occurs when market participants observe returns on a security that are larger than what is justified by the characteristics of that security and take action to quickly eliminate the unexploited profit opportunity.
A)Arbitrage
B)Mediation
C)Asset capitalization
D)Market intercession

Question

Quizplus · Accepted Answer

This is the definition of arbitrage, which involves taking advantage of temporary pricing discrepancies in the market to make risk-free profits. When market participants observe returns on a security that are larger than what is justified by the characteristics of that security, they will buy the security to drive up its price and sell it when the price normalizes, thus eliminating the unexploited profit opportunity.

________ Occurs When Market Participants Observe Returns on a Security