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Yes, you can get a juicy yield from a pot ETF. But here’s the catch - The Globe and Mail

Takeover deals create arbitrage opportunities that involve selling short the acquirer’s stock [I emboldened.] and going long on the target company , and the ensuing demand for borrowed shares drives up the rates Horizons can charge, Mr. Noble says.

Why sell short the acquirer's stock? Why assume that the acquirer's stock will fall? Can't it increase like the target company's?

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In simple terms, an acquisition usually happens when a successful (read: low-risk) company purchases an unsuccessful (read: high-risk) company. It can be viewed as a transference of risk from the acquiree to the acquirer, and all things being equal, the market demands higher returns from riskier assets. In the short-term this is effected through the price, and one channel for this is that risk-averse holders of the acquiring company will move to safer harbors. The acquirer's stock thus falls, implying a higher return in line with the new level of risk. The market also demands lower returns from lower-risk assets, and so more investment will flow into the acquiree, driving its price up.

Obviously, there's more going on and this is not investment advice. It's just a rule of thumb.

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  • $\begingroup$ Nice explanation about the transfer of risk element! $\endgroup$ – zeta-band Nov 14 '19 at 19:29

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