QUESTIUN 5 This question can be a little tough. In the binomial tree model, if one plus the risk-free rate is LOWER than the down factor (it sounds a little wierd, but a down factor could be larger than one under some circumstance), then which of the following statement is NOT correct? One could arbitrage for a riskless profit The risk-neutral probability doesn't make sense any more. To arbitrage for the riskless profit, an investor need to long the stock with borrowed money To arbitrage for the riskless profit, an investor need to short the stock and invest the proceeds at the risk-free rate