Long-Term Capital Management (LTCM) was a major hedge fund in the 1990s. It grew

Question

Long-Term Capital Management (LTCM) was a major hedge fund in the 1990s. It grew rapidly using sophisticated statistical modeling to find tiny price mismatches between countries. It would bet these prices would converge which they always did.

LTCM was making money so easily (over 40% return!), that other firms started copying them. This competition make it difficult to exploit these price differences. Margins became very slim (which forced LTCM to enter riskier markets, ultimately resulting in its collapse in 1998; the fund opened in 1994 so it was quite the journey!).

LTCM's difficulty of making a lot of money easily illustrates what idea?

Diversification

Gross profit margin

Elimination principle

Compound returns

Diversification

Gross profit margin

Elimination principle

Compound returns

Explanation / Answer

Option C)

According to elimination principle, in a competitive market, firms earning above normal profits are eliminated by entry of other new firms and firms earning below normal profits are eliminated by exit

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.