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Understanding Arbitrage: An Intuitive Approach to Financial Analysis by Randall Billingsley

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Chapter 2. Arbitrage in Action

Emotion, like instinct not moored in analysis, could be misleading. If you became frightened easily—or were greedy—you couldn’t function effectively as an arbitrageur ... To an outsider, our business might have looked like gambling... It was an investment business built on careful analysis, disciplined judgment—often made under considerable pressure—and the law of averages.

Robert E. Rubin, former U. S. Secretary of the Treasury, describing risk arbitrage at Goldman Sachs1

You can best understand arbitrage by considering examples that reflect different perspectives and involve varying degrees of complexity. The first example in this chapter presents the intuitively obvious case of a mispriced individual commodity—gold. ...

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