paper for arbitrage and efficient markets, business and finance homework help

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1234zlu

Business Finance

Description

Part 1 - give a brief overview of how basic arbitrage would work and why and investor would want to seek out such opportunities.

Part 2 - give a brief overview of what market efficiency means and what this means for investors if it does truly exist

Part 3 - explain why market efficiency and the existence of arbitrage opportunities must be at odds with one another

(can arbitrage exist if markets are strong form efficient, why?)

Part 4 - given what you have covered in the first four chapters, how would market efficiency affect you ability to earn above normal returns in your investment portfolio (are we all searching for arbitrage opportunities when we invest)

Part 5 - in summary, tell me whether you believe markets are weak, semi-strong, or strong form efficiency, and whether you believe arbitrage opportunities exist in the markets.

This should be no less than seven(7) double spaced typed pages and include no less that five (5) listed sources at the end of the paper (does not count in the required length). I do not have any format that I need on your sources, just give adequate source information that I can go to them to see the content of your source.

NO COPY!

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Explanation & Answer

Attached.

1
ARBITRAGE AND EFFICIENT MARKETS
Part 1: Overview of Arbitrage
Arbitrage generally refers to the buying of a financial security in one market and selling it
at the same time in another market at a price that is higher than the original buying price. This
enables an investor to make profit from a temporary change in market prices of specific assets. In
essence, this is type of return is often referred to as a riskless profit that is generated out of
market deficiencies. An arbitrage works when there is existence of different asset prices in
specific market securities that allows an investor to trade simultaneously and make risk free
profit (Cutland & Roux, 2012). For example, an investor may purchase a stock on a foreign
exchange like the New York Stock Exchange at $5 per share, where the stock price has not yet
adjusted for the constant changes in exchange rate and immediately sale it Chicago Stock
Exchange at $5.2 per share, thereby locking in a profit of 0.2 per share. This means that the price
of the stock is undervalued on the foreign exchange as compared to the price of the stock on the
local exchange. Therefore, an investor can make risk free profit from this difference in the prices
of the stock. By taking advantage of price discrepancies in different markets of identical assets,
investors provide liquidity to the markets by acting as financial intermediaries, thus contributing
to market efficiency (Bodie, 2013).
An investor would want to seek out such opportunities because they are risk free in
nature and they have tax advantage as compared to debt funds. Arbitrage opportunities have a
high potential of delivering to an investor better post-tax returns similar to an equity investment
(Bodie, 2013).

2
Part 2: Overview of Market Efficiency
Market efficiency generally refers to the degree to which the prices of stock and other
securities in the market reflect all the relevant and available information. Market efficiency
basically measures the accessibility and readiness of market information that offers buyers and
sellers maximum amount of opportunities to conduct their transactions without incurring more
costs (Basse & Bassen, 2010). Market efficiency exist in three common forms namely, weakform efficiency, semi-strong efficiency and lastly, the strong-form efficiency. In a weak-form
efficient market, prices of assets cannot be forecasted using the information from past prices and
this means that in the long run, excess returns cannot be achieved on ...


Anonymous
Just what I was looking for! Super helpful.

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