Author Question: Who is an arbitrageur? How does an arbitrageur make money? What will be an ideal ... (Read 62 times)

809779 · **on:** Jul 10, 2018

Who is an arbitrageur? How does an arbitrageur make money?

What will be an ideal response?

Question 2

Delilah Jones has a portfolio of stocks A and B. See the table below for details. What is the correlation between the two stocks?

A B Portfolio
Weights 40 60
Expected Return 15 20
Standard Deviation 20 22 11.5169

A) -1.0
B) -0.5
C) 0
D) 0.5
E) 1.0

bitingbit · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

The foreign exchange quotes in two different countries must be in line with each other. If the exchange rate quotations
between the London and New York spot exchange markets were out of line, then an enterprising trader could make a
profit by buying in the market where the currency was cheaper and selling it in the other. Such a buy-and-sell strategy
would involve a zero net investment of funds and no risk bearing, yet it would provide a sure profit. A person
executing this strategy is called an arbitrageur, and the process of buying and selling in more than one market to make
a riskless profit is called arbitrage. Spot exchange markets are efficient in the sense that arbitrage opportunities do not
persist for any length of time. That is, the exchange rates between two different markets are quickly brought in line,
aided by the arbitrage process. Arbitrage eliminates exchange rate differentials across the markets for a single
currency, as in the preceding example for the New York and London quotes.

Answer to Question 2

B