Skip to content

FRM Part II · FRM Exam Part II · Alpha (and the Low-Risk Anomaly)

Which statement best describes why limits to arbitrage help the low-risk anomaly persist?

Exploiting the anomaly means levering up low-beta stocks and shorting high-beta ones, which faces funding costs, margin requirements and benchmark or career risk. These limits to arbitrage prevent capital from fully eliminating the mispricing.

  1. AArbitrageurs can easily short high-beta stocks without cost
  2. BExploiting the anomaly requires leverage on low-beta stocks and shorting high-beta stocks, which is constrained by funding costs, margin requirements and benchmark riskCorrect
  3. CThe anomaly is fully eliminated after transaction costs for all investors
  4. DLow-beta stocks cannot be purchased by institutions

Explanation

A betting-against-beta strategy needs leverage and shorting, which carry funding, margin and career risks. These frictions prevent arbitrage from closing the mispricing. The other options misstate market conditions.

Did you get it right without looking?

One question tells you little. A timed set on Alpha (and the Low-Risk Anomaly) shows your real accuracy, how long you take and where you lose marks.

Practise Alpha (and the Low-Risk Anomaly)Free diagnostic mock

More Alpha (and the Low-Risk Anomaly) questions