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Answer: The exploitation of security mispricing aimed at making risk-free profits.
## Explanation Arbitrage in security trading refers to **the exploitation of security mispricing aimed at making risk-free profits**. This involves simultaneously buying and selling the same security in different markets to capitalize on price discrepancies. The key characteristics of arbitrage are: - **Risk-free nature**: Arbitrage profits come from price differences, not from market movements - **Simultaneous transactions**: Buying and selling occur at the same time - **Market efficiency**: Arbitrageurs help maintain price consistency across markets ### Why other options are incorrect: **Choice A**: While exploiting undervalued assets can increase returns, this describes value investing rather than arbitrage. Arbitrage specifically targets price discrepancies between markets. **Choice C**: This describes market timing strategies, which involve predicting price movements and carry risk. Arbitrage is risk-free and doesn't rely on timing. **Choice D**: This describes illegal activities like tax evasion, which has no relation to legitimate arbitrage trading strategies. Arbitrage plays a crucial role in financial markets by ensuring price efficiency and eliminating temporary pricing anomalies.
Author: Tanishq Prabhu
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Define arbitrage as used in the context of security trading.
A
The exploitation of undervalued assets so as to increase returns.
B
The exploitation of security mispricing aimed at making risk-free profits.
C
The skill of accurately timing returns so as to obtain optimal profit from a security.
D
The exploitation of illegal trading channels aimed at making tax-free profits.