of Apex, Bull, and Crush have to go up. The arbitrage opportunity will then be eliminated.       CONCEPT C H E C K ☞ QUESTION 1 Suppose that Drecks price starts falling without any change in its per-share dollar payoffs. How far must the price fall before arbitrage between Dreck and the equally weighted portfolio is no longer possible? (Hint: What happens to the amount of the equally weighted portfolio that can be purchased with the proceeds of the short sale as Drecks price falls?)     The idea that market prices will move to rule out arbitrage opportunities is perhaps the most fundamental concept in capital market theory. Violation of this restriction would in- dicate the grossest form of market irrationality. The critical property of a risk-free arbitrage portfolio is that any investor, regardless of risk aversion or wealth, will want to take an infinite position in it. Because those large po- sitions will force prices up or down until the opportunity vanishes, we can derive restric- tions on security prices that satisfy a "no-arbitrage" condition, that is, prices for which no arbitrage opportunities are left in the marketplace. There is an important difference between arbitrage and risk-return dominance argu- ments in support of equilibrium price relationships. A dominance argument holds that when an equilibrium price relationship is violated, many investors will make portfolio changes. Individual investors will make limited changes, though, depending on their degree of risk aversion. Aggregation of these limited portfolio changes is required to create a large vol- ume of buying and selling, which in turn restores equilibrium prices. By contrast, when ar- bitrage opportunities exist each investor wants to take as large a position as possible; hence it will not take many investors to bring about the price pressures necessary to restore equi- librium. Therefore, implications for prices derived from no-arbitrage arguments are stronger than implications derived from a risk-return dominance argument. The CAPM is an example of a dominance argument, implying that all investors hold mean-variance efficient portfolios. If a security is mispriced, then investors will tilt their portfolios toward the underpriced and away from the overpriced securities. Pressure on equilibrium prices results from many investors shifting their portfolios, each by a relatively small dollar amount. The assumption that a large number of investors are mean-variance sensitive is critical; in contrast, the implication of a no-arbitrage condition is that a few in- vestors who identify an arbitrage opportunity will mobilize large dollar amounts and re- store equilibrium. Practitioners often use the terms "arbitrage" and "arbitrageurs" more loosely than our strict definition. "Arbitrageur" often refers to a professional searching for mispriced secu- rities in specific areas such as merger-target stocks, rather than to one who seeks strict (risk-free) arbitrage opportunities. Such activity is sometimes called risk arbitrage to dis- tinguish it from pure arbitrage. To leap ahead, in Part VI we will discuss "derivative" securities such as futures