Answer: Risk-free arbitrage.

## Explanation This question describes **risk-free arbitrage**, which occurs when an investor can exploit pricing discrepancies in the market to earn a risk-free profit. Here's why: ### Key Characteristics of Risk-Free Arbitrage: - **Violation of equilibrium price relationship**: When assets are mispriced relative to their fundamental relationship - **Large position size**: Arbitrageurs take maximum positions to maximize profits since the opportunity is risk-free - **Risk-free profit**: The strategy involves no risk when executed properly ### Why Other Options Are Incorrect: - **B. Capital Asset Pricing Model (CAPM)**: This is a theoretical model for pricing risky securities, not an investment strategy - **C. Mean-Variance Frontier**: This represents the set of optimal portfolios that offer the highest expected return for a given level of risk - **D. Single Factor Security Market Line**: This is the graphical representation of CAPM showing the relationship between expected return and systematic risk ### Arbitrage in Practice: When equilibrium relationships (like put-call parity, covered interest parity, or law of one price) are violated, arbitrageurs immediately exploit these opportunities by taking large positions until the mispricing disappears, restoring market efficiency.

Author: Tanishq Prabhu