Refer to the graph. Consider asset D. We would expect arbitrage to
A) increase the risk level of D.
B) increase the price of D.
C) lower the price of D.
D) increase both the expected return and risk level of D.

Question

Refer to the graph. Consider asset D. We would expect arbitrage to
A) increase the risk level of D. 
B) increase the price of D. 
C) lower the price of D. 
D) increase both the expected return and risk level of D.

Quizplus · Accepted Answer

If arbitrage occurs, it means that the price of asset D is higher than its theoretical value based on the other assets in the portfolio. This would lead to selling of D and buying of the other assets in the portfolio, causing the price of D to decrease until it aligns with its theoretical value. Therefore, we would expect arbitrage to lower the price of D.

Refer to the Graph