Consider a single factor APT. Portfolio A has a beta of 2.0 and an expected return of 22%. Portfolio B has a beta of 1.5 and an expected return of 17%. The risk-free rate of return is 4%. 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 has a higher expected return relative to its beta compared to Portfolio B, indicating it is undervalued. Therefore, you should short Portfolio B and go long on Portfolio A to exploit the arbitrage opportunity.

Consider a Single Factor APT