Lorenzo notes that the market includes securities A and B whose prices in one-year depend only upon whether the market is "up," "steady," or "neutral." A; which has a current share price of $25, will sell for $32, $25, or $22 respectively, while B, with a current share price of $14, will sell for $16, $14, or $12, respectively. Explain how Lorenzo has an arbitrage opportunity, assuming there are no costs associated with trading A and B.

Answer rating: 100% (QA)

Lorenzo can create an arbitrage opportunity by constructing a portfolio of securities A and B that r... View the full answer