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:

Detrimental Behavior

Actions or habits that are harmful or damaging, particularly in the context of economic, social, or health outcomes.

System 2 Decision

A decision-making process that involves analytical and thoughtful consideration, as opposed to quick, automatic thinking.

Carefully Planned Diet

A diet meticulously outlined to meet nutritional needs, often for specific health conditions or fitness goals.

Driving Route

The predetermined path or directions followed when operating a vehicle from one location to another.