Question

The risk that the mispricing will worsen in the short run, leading

to fund outflows or margin calls, is an additional deterrent to professional arbitrageurs. This statement is associated to

Select one:

a. Model risk in limits of arbitrage

b. Model risk in CAPM

c. Noisy traders in limits of arbitrage

d. Noisy traders in Arbitrage Portfolio Theory

Answer 1

this statement is a representation of noisy traders in the limits to arbitrage because there will be a high degree of mispricing in the short run as there would be panic due to adverse economic situations and this will be leading to a reflection of noisy trading which is not based upon the fundamental but which is based upon the noise so, professional arbitrageurs will be getting their margin calls triggered and they will also be forced to cut their position due to higher volatility.

Correct answer will be option (C) noisy traders in limits of arbitrage