An investor will take as large a position as possible when an equilibrium price relationship is violated.This is an example of ______________.
A) a dominance argument
B) the mean-variance efficiency frontier
C) a risk-free arbitrage
D) the capital asset pricing model
E) none of these

Question

Quizplus · Accepted Answer

This situation describes risk-free arbitrage, which occurs when an investor can make a profit without any risk by exploiting a market inefficiency. In this case, the violation of an equilibrium price relationship presents an opportunity for the investor to take a large position and earn a profit from the price discrepancy. This is done without taking on any risk, making it an example of risk-free arbitrage. None of the other options are applicable to this scenario.

An Investor Will Take as Large a Position as Possible