Which of the following statements is the best description of the ability of arbitrageurs to correct market anomalies?
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A. B. C.A
The ability of arbitrageurs to correct market anomalies refers to their capacity to identify and take advantage of mispriced securities or assets in the market in order to generate profits. Let's examine each of the given statements in detail to determine the best description.
A. Only the more significant mispricing may be exploited while others are allowed to persist. This statement suggests that arbitrageurs focus primarily on significant mispricing opportunities and may not address smaller or less significant anomalies. While it is true that arbitrageurs tend to target larger mispricings due to the potential for higher profits, it does not imply that they completely ignore or allow smaller mispricings to persist. Arbitrageurs are generally opportunistic and will exploit any mispricing that offers a profit potential.
B. There is a high degree of reliability that apparent mispricing will be corrected. This statement highlights the expectation that mispricing in the market will be corrected with a high degree of reliability. Arbitrageurs rely on the principle of efficient markets, which suggests that any mispricing will eventually be eliminated as market participants exploit the profit opportunity. Therefore, this statement accurately reflects the role of arbitrageurs in correcting market anomalies.
C. Investors supply largely unlimited amounts of capital to arbitrageurs because of the reliability of the returns. This statement suggests that investors provide arbitrageurs with abundant capital due to the reliable returns generated by arbitrage strategies. While arbitrage opportunities can be lucrative, it is not accurate to say that investors supply unlimited amounts of capital. Investors allocate capital based on their risk appetite, investment objectives, and assessment of the opportunities presented by arbitrageurs. The statement overstates the level of capital support and does not capture the complete picture.
Considering the above explanations, the best description of the ability of arbitrageurs to correct market anomalies is:
B. There is a high degree of reliability that apparent mispricing will be corrected.
This statement accurately captures the role of arbitrageurs in exploiting mispricings and their expectation that such anomalies will be rectified in efficient markets.