1. D. People believe they must try to make money as quickly as possible in the markets for all three reasons. They believe they have the ability to predict market psychology and turns in the markets. The lingering effects of the financial crisis and two recent bear markets leave them worried about the long term. Finally, there is always the persistent human instinct of greed that comes into play.
2. B. According to the paper by Shleifer and Vishny, the cost of arbitrage is the amount of time your capital is invested.
3. D. According to the paper by Shleifer and Vishny, risk is defined as the amount of uncertainty over the outcome.
4. A. According to the paper by Shleifer and Vishny, return is the absolute amount of money made on the investment.
5. C. One of the conclusions in Shleifer and Vishny’s paper is that long-term arbitrage is more expensive than short-horizon arbitrage; therefore the return must be greater. Longer time horizons tie up capital for longer periods, so the expected return should be greater.
6. C. Shleifer and Vishny point out that common stocks can be used for short-horizon arbitrage. Short-term speculators, acting as information arbitrageurs, may bet on the outcome of a takeover possibility, earnings release, or other announcement, which would make the mispricing of the stock disappear very quickly.
7. B. In order to generate substantial returns from short-term arbitrage, a strategy should ...