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Lessons for Investors

This chapter should act as a cautionary note for those investors who believe that they have found the proverbial free lunch in investing. If you seek pure arbitrage—two identical assets that you can buy at different prices and lock in the profits—you will generally not find it in liquid markets. In illiquid markets, you may come across such mispricing but your transactions costs will have to be small for you to earn arbitrage profits.

Your chances of success are greater if you look for near arbitrage, in which two assets that are almost identical are mispriced. If you choose to pursue these opportunities, you will improve your odds of success if you do the following:


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