Which of the following case studies illustrates a limit to arbitrage as discussed in the text?
A) "Siamese twin" companies
B) equity carve-outs
C) closed-end funds
D) all of the options.

Question

Quizplus · Accepted Answer

All of the given options illustrate limits to arbitrage, as discussed in the text.

A) "Siamese twin" companies refers to companies with a dual-class share structure, where one class has superior voting rights. This makes it difficult for investors to take control of the company and steer it in a different direction.

B) Equity carve-outs refer to when a parent company sells a minority stake in one of its subsidiaries to the public. The valuation of the subsidiary may not reflect its true value, and the parent company may have information asymmetry that makes it difficult for investors to determine the correct value.

C) Closed-end funds trade at a price that may deviate from their net asset value due to supply and demand factors, creating opportunities for arbitrageurs to buy low and sell high. However, there may not be enough liquidity or willingness to take the other side of the trade, limiting arbitrage opportunities.

Therefore, all of the options demonstrate limits to arbitrage, making D the correct answer.

Which of the Following Case Studies Illustrates a Limit to Arbitrage