Arbitrageurs may be unable to exploit behavioral biases due to I) fundamental risk.
II. implementation costs.
III. model risk.
IV. conservatism.
V. regret avoidance.
A)I and II only
B)I, II, and III
C)I, II, III, and V
D)II, III, and IV

Question

Quizplus · Accepted Answer

Arbitrageurs may be unable to exploit behavioral biases due to fundamental risk associated with the underlying asset or market, implementation costs such as transaction fees, and model risk involved in predicting and executing the trade. Conservatism may also limit arbitrage opportunities, but regret avoidance is not a significant impediment to behavioral arbitrage. Therefore, options A and C are eliminated. Option D only includes implementation costs, model risk, and conservatism, but not fundamental risk, which is also a crucial constraint for arbitrageurs. Hence, the correct answer is B.

Arbitrageurs May Be Unable to Exploit Behavioral Biases Due to I)