Consider a single factor APT. Portfolio A has a beta of 1.0 and an expected return of 16%. Portfolio B has a beta of 0.8 and an expected return of 12%. The risk-free rate of return is 6%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _______.
A) A; A
B) A; B
C) B; A
D) B; B
E) A; the riskless asset

Question

Quizplus · Accepted Answer

Portfolio A offers a higher return than Portfolio B for the same level of risk (beta), indicating an arbitrage opportunity. Therefore, short Portfolio B and long Portfolio A.

Consider a Single Factor APT