Explanation:
Risk-free arbitrage occurs when an investor can exploit a mispricing or violation of an equilibrium price relationship to lock in a riskless profit without net investment. Because the profit is guaranteed and risk-free, a rational investor would theoretically want to take an infinitely large position to maximize their risk-free gains.
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Q.231 When the equilibrium price relationship is violated, an investor will try to take as large a position as possible. This is an example of:
A
Risk-free arbitrage.
B
The capital asset pricing model.
C
The mean-variance frontier.
D
The single factor security market line.
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