How does a Relative Value Strategy typically function?

A Relative Value Strategy functions by identifying and capitalizing on mispriced pairs of securities. This strategy relies on the belief that the prices of these securities will converge over time, allowing the investor to profit from the price difference. The strategy may involve going long on a security that is undervalued while simultaneously shorting a related security that is considered overvalued. The essence of this approach is based on market inefficiencies and the principles of arbitrage.

Focusing on mispriced pairs allows investors to mitigate some systematic risks associated with overall market movements, thus emphasizing the relative value between the two securities rather than their absolute price movements. Investors using this strategy are primarily concerned with the relationship between the two securities rather than the broader market direction, which accounts for why the first answer does not align with the core function of a Relative Value Strategy.

The remaining options describe strategies or approaches that do not align with the fundamental nature of relative value investing: maximizing risk without concern for returns goes against the prudent management of investments inherent in this strategy, while investing only in stable securities does not capture the dynamic aspect of seeking mispriced opportunities.