Systematic & Statistical Arbitrage — Final Exam

This is the capstone. Six lessons built the discipline of harvesting relative value — betting on relationships instead of direction, hedging the market clean out of the book, and stacking thousands of tiny, repeatable edges until the law of large numbers turns a coin-flip into a business. You learned why arbitrage lives on a spectrum from risk-free to purely statistical and why breadth (IR ≈ IC·√N) is the engine; how cointegration, not mere correlation, builds a stationary spread you can standardize into a z-score and trade at the ±2σ bands with a measurable half-life; how mean reversion and momentum are mirror images whose dominance flips with horizon and regime; how to turn a raw signal into a dollar-, beta-, and factor-neutral book of pure residual alpha; how to combine weak independent signals and respect the brutal decay-versus-turnover trade-off that sets your rebalance speed; and why every strategy hits a capacity ceiling, why crowding secretly collapses your breadth, and how a deleveraging spiral turned August 2007 into the quant quake. No formula sheet, no hints, no take-backs: every answer locks the instant you submit, the wrong options are the exact traps that fool real desks, and your score stays hidden until the end.