Arbitrage Q

Which of the following is a limitation of abritrage in correcting anomalies? a arbitrage is a relatively riskless activity, which has led to consistently reduced profits for many arbitrageurs, thereby reducing their interest in correcting market anomalies. b There is no limitation of arbitrage in correcting anomolies because arbitrageurs will use their capital to pursue any trade to exploit percieved mispricing c Arbitrageurs is not always riskless, so trading based on information that a security is undervalued or overvalued does not ensure a profit d arbitrageurs are sophisticated trader, but too few of them exist to contribute significantly to the correction of market anomalies



yeah, its C but I thought B. Isnt arbitrague riskless? i guess not…

capital is limited and it needs to be used wisely so it can’t be B

C edit: Arbitrage “should” be riskless but you run the risk of uninformed investors mucking things up

Arbitrage is by definition riskless. The question should be asking “what is the limitation of hedge funds that say they are practicing arbitrage but in fact are just trading on perceived rather than actual inefficiency”

I like B better too. Capital is limited? Say what? The available capital for arbitrage is at least 100 times greater than the world’s collective yearly production of goods and services. I suppose that’s a limit but it’s pretty huge.