Instructions: Round your answers to $2$ decimal places.

a$.$ What are the rates of return of assets A and $B$ at their current prices?

Return on asset $A=,$ percent

Return on asset $B=,$ percent

Given these rates of return, which asset should investors buy and which asset should they sell?

Buy asset Click to select$)$ and sell asset Click to select$)vv.$

b$.$ Assume that arbitrage continues until A and $B$ have the same expected rate of return. When arbitrage ends, will A and $B$ have the

same price?

$($Click to select$)$

Next, consider another pair of assets, $C$ and $D.$ Asset $C$ will make a single payment of $$150$ in $1$ year, while $D$ will make a single

payment of $$200$ in $1$ year. Assume that the current price of $C$ is $$115$ and that the current price of $D$ is $$175.$

c$.$ What are the rates of return of assets $C$ and $D$ at their current prices?

Return on asset $C=$

percent

Return on asset $D=$

percent

Given these rates of return, which asset should investors buy and which asset should they sell?

Buy asset Click to select$)$ and sell asset $($Click to select$)vv.$

d$.$ Assume that arbitrage continues until $C$ and $D$ have the same expected rate of return. When arbitrage ends, will $C$ and $D$ have the

same price?

Compare your answers to questions a through $d$ before answering question $e.$

e$.$ We know that arbitrage will equalize rates of return. Does it also guarantee to equalize prices?

$($Click to select$)vv$

In what situations will it also equalize prices?