AFers With regards to the the practice problem on Page 92, question 2,can anybody explain why statement 1- “specific risk to arbitrage can be managed and provide an opportunity for profitable trading” is not correct. TIA
The statement you mentioned is correct, but that is not what is being referred to in the question. The comment referred to in the question and which is incorrect is: “trading friction is beneficial to arbitrageurs because it provides higher returns”
Trading friction is a type of “chronic inefficiency” which is slow to correct and exploit and requires a longer horizon arbitrage position holding which all adds up to less oppotunity to profit.