Stock X has an expected return of 15% based on its current share price and cashflow forecasts. Under the APT, given its risk exposure, the fair expected return is 19%. When constructing her arbitrage portfolio, how would an arbitrageur trade in this situation? а. Buy the stock as price is too low. Buying increases price, reducing return. b. Buy the stock as price is too low. Buying increases price, increasing return. С. Do nothing - without risk-free rate cannot tell. d. Short sell the stock as the price is too high. Selling reduces price, increasing return.

Stock X has an expected return of 15% based on its current share price and cashflow forecasts. Under the APT, given its risk exposure, the fair expected return is 19%. When constructing her arbitrage portfolio, how would an arbitrageur trade in this situation? а. Buy the stock as price is too low. Buying increases price, reducing return. b. Buy the stock as price is too low. Buying increases price, increasing return. С. Do nothing - without risk-free rate cannot tell. d. Short sell the stock as the price is too high. Selling reduces price, increasing return.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 15P

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