# Question

An Exchange-Traded Fund (ETF) is a security that represents a portfolio of individual stocks. Consider an ETF for which each share represents a portfolio of two shares of Hewlett-Packard (HPQ), one share of Sears (SHLD), and three shares of General Electric (GE). Suppose the current stock prices of each individual stock are as shown here:

Stock .. Current Market Price

HPQ ........ $28

SHLD ...... $40

GE ........ $14

a. What is the price per share of the ETF in a normal market?

b. If the ETF currently trades for $120, what arbitrage opportunity is available? What trades would you make?

c. If the ETF currently trades for $150, what arbitrage opportunity is available? What trades would you make?

Stock .. Current Market Price

HPQ ........ $28

SHLD ...... $40

GE ........ $14

a. What is the price per share of the ETF in a normal market?

b. If the ETF currently trades for $120, what arbitrage opportunity is available? What trades would you make?

c. If the ETF currently trades for $150, what arbitrage opportunity is available? What trades would you make?

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