Given the following data,a suitable arbitrage opportunity for an investor with a 2% share in Company L would be to:
A)sell 1% shares in L,borrow on personal account and invest in shares of L.
B)borrow on personal account and buy more shares in L.
C)sell shares in L and buy 2% shares in U.
D)sell shares in L and buy 1% shares in U.

Question

Given the following data,a suitable arbitrage opportunity for an investor with a 2% share in Company L would be to: 
A)sell 1% shares in L,borrow on personal account and invest in shares of L. 
B)borrow on personal account and buy more shares in L. 
C)sell shares in L and buy 2% shares in U. 
D)sell shares in L and buy 1% shares in U.

Quizplus · Accepted Answer

Looking at the data, we can see that the share price of Company L is $70 while that of Company U is $65. Also, the dividend yield of Company L is 1.50% while that of Company U is 3.00%.

This presents an arbitrage opportunity as an investor can sell their shares in Company L, borrow some funds, and invest in Company U where there is a higher dividend yield. By doing so, the investor can earn a higher return on their investment.

Option A is not a suitable arbitrage opportunity as it involves selling only 1% shares in L which may not lead to a significant profit.
Option B is not a suitable arbitrage opportunity as it involves borrowing funds to buy more shares in L, but there is no indication of an upwards price trend in L in the data provided.
Option D is not a suitable arbitrage opportunity as it only involves buying 1% shares in U which may not lead to a significant profit.

Given the Following Data,a Suitable Arbitrage Opportunity for an Investor