Merger Arbitrage and Sharpe Ratio

CFA Level III Alternative Investments
#1

how come merger arbitrage has a high Sharpe Ratio?

#2

Excellent question.

Sharpe ratio is high because risk is low. See the table below. Risk is low because you are going long and short in a M & A.

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1 Like
#3

thank you so much

I just have two quick questions. The return profile of the merger arbitrage is compared to that of options.

  1. We compare the return profile of merger arbitrage to call option because i am assuming that see we go long the target company and it does get acquired, there is a huge potential
  2. Riskless bond+ short put option - this is where I am confused. Why does the return of merger arbitrage reassemble a riskless bond + short put option?