Consider the beta (or volatility) anomaly and arbitrage concept.
a) What is basic premise behind this anomaly? How is it empirically observed?
b) How can you explain the existence of such an anomaly with behavioral biases of investors?
c) What are some other limits to arbitrage that might possibly contribute to relative mispricing caused by this anomaly? Explain.
d) As a professional investor, how would you try to exploit this mispricing? Are there any risks associated with such a strategy that you should be aware?