Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Question
Chapter 3.4, Problem 1CC
Summary Introduction
To discuss: The impact on investors' profit while violating the law of one price.
Introduction:
When investment opportunities of the same nature or commodities trade in two competitive markets with price differences, the investors will be benefited, as they will purchase in the market where the prices are cheap and they will sell in the market where the prices are high. By doing so, they will equalize the competitive prices of the market. This concept is known as “the law of one price”.
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Students have asked these similar questions
The law of one price states that the same commodity must sell at the same price in a well-functioning market
TRUE/FALSE?
Even if behavioral biases do not affect equilibrium asset prices, why might it still be important for investors to be aware of them?
Which of the following statements is true?
a) It is possible that the Arbitrage Pricing Theory is Valid and the Capital Asset Pricing Model is not.
b) It is possible that the Capital Asset Pricing Model is valid and the Arbitrage Pricing Theory is not.
Chapter 3 Solutions
Corporate Finance
Ch. 3.1 - Prob. 1CCCh. 3.1 - If crude oil trades in a competitive market, would...Ch. 3.2 - How do you compare costs at different points in...Ch. 3.2 - Prob. 2CCCh. 3.3 - What is the NPV decision rule?Ch. 3.3 - Why doesnt the NPV decision rule depend on the...Ch. 3.4 - Prob. 1CCCh. 3.4 - Prob. 2CCCh. 3.5 - If a firm makes an investment that has a positive...Ch. 3.5 - Prob. 2CC
Ch. 3.5 - Prob. 3CCCh. 3.A - The table here shows the no-arbitrage prices of...Ch. 3.A - Suppose security Chas a payoff of 600 when the...Ch. 3.A - Prob. A.3PCh. 3.A - Prob. A.4PCh. 3.A - Prob. A.5PCh. 3.A - Consider a portfolio of two securities: one share...Ch. 3.A2 - Why does the expected return of a risky security...Ch. 3.A2 - Prob. 2CCCh. 3.A3 - Prob. 1CCCh. 3.A3 - Prob. 2CCCh. 3 - Honda Motor Company is considering offering a 2000...Ch. 3 - You are an international shrimp trader. A food...Ch. 3 - Prob. 3PCh. 3 - Prob. 4PCh. 3 - You have decided to take your daughter skiing in...Ch. 3 - Suppose the risk-free interest rate is 4%. a....Ch. 3 - You have an investment opportunity in Japan. It...Ch. 3 - Your firm has a risk-free investment opportunity...Ch. 3 - You run a construction firm. You have just won a...Ch. 3 - Your firm has identified three potential...Ch. 3 - Your computer manufacturing firm must purchase...Ch. 3 - Prob. 12PCh. 3 - Prob. 13PCh. 3 - Prob. 14PCh. 3 - Prob. 15PCh. 3 - An Exchange-Traded Fund (ETF) is a security that...Ch. 3 - Consider two securities that pay risk-free cash...Ch. 3 - Prob. 18P
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Similar questions
- Why would an advocate of the efficient market hypothesis believe that even if many investors exhibit the behavioral biases, security prices might still be set efficiently?arrow_forwardIf all investors believe that the market is efficient, could that eventually lead to less efficiency in the market? Explain with an example.arrow_forward: Does the Efficient Market Hypothesi hold true? Why or why not?arrow_forward
- Why would a risk-taker (likes to take risks) type of investor prefer equities over fixed income?arrow_forwardIn the presence of the ‘free rider’ problem ,private markets will always produce inefficient outcomes. True or false, and explainarrow_forwardAdvocates of the efficient market hypothesis would agree that it is virtually impossible for any investor to consistenrly outperform the market (T/F)arrow_forward
- In financial markets, if there is an untapped profit opportunity, arbitrageurs will realize it and it will disappear. What does the EMH hypothesis say about the consequences of these arbitrageurs on prices?arrow_forwardHow does regret avoidance contribute to the disposition effect? What kind of steps do professional traders take to avoid holding losers?arrow_forwardWhat would happen to market efficiency if all investors attempted to follow a passive strategy?arrow_forward
- market mispricing creates arbitrage opportunities, is this true and how. the actions of arbitrageurs contributes towards the removal of mispricing, is this true and how.arrow_forwardShould the bid be lower than the ask for a market maker or a price taker? Explainarrow_forwardWhich of the following might discourage covered interest arbitrage even if interest rate parity does not exist? A. transaction costs. B. political risk. C. differential tax laws. D. all of the above. E. none of the above.arrow_forward
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