If the Sharpe Ratio for Interest Arbitrage Situations Is Low

question 28

Multiple Choice

If the Sharpe ratio for interest arbitrage situations is low, how may this explain why traders shun available profits and why UIP may not hold?

• A) The ratio of rewards to risk is below the threshold required for investors.
• B) Investors know that in the long run, their returns will be close to zero.
• C) Investors are extremely risk averse.
• D) There are known limits to arbitrage profits.

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Definitions:

Income Earned

Refers to all forms of compensation or remuneration received from employment, including wages, salaries, bonuses, and other earnings.

Hourly Minimum Wage

The lowest legal wage that can be paid to workers for an hour of employment.

Economic Rent

A payment to a factor of production in excess of the cost needed to bring that factor into production.

Harder Work

Increased effort by individuals or groups to achieve better results or higher productivity in their jobs or tasks.