Which of the following create limits to arbitrage?
I.risks related to an individual firm
II.implementation costs
III.rational traders
IV.noise traders
A)I and III only
B)II and IV only
C)I, II, and III only
D)I, II, and IV only
E)I, II, III, and IV

Question

Quizplus · Accepted Answer

Limits to arbitrage are factors that prevent traders who identify mispricings in the market from exploiting them fully. These limits include risks related to an individual firm (I), such as bankruptcy or sudden negative news, as well as implementation costs (II), such as transaction costs, financing costs, or regulatory barriers to short selling. Rational traders (III) do not create limits to arbitrage, as they would be the ones taking advantage of mispricings. However, noise traders (IV), who trade on emotions or imperfect information, can exacerbate mispricings and create limits to arbitrage for rational traders. Therefore, the correct answer is D: I, II, and IV only.

Which of the Following Create Limits to Arbitrage