Consider the single factor APT. Portfolio A has a beta of 0.5 and an expected return of 12%. Portfolio B has a beta of 0.4 and an expected return of 13%. The risk-free rate of return is 5%. 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

Question

Quizplus · Accepted Answer

Portfolio A has a lower beta and a higher expected return than portfolio B, which violates the APT. To take advantage of this arbitrage opportunity, you should take a short position in portfolio A and a long position in portfolio B.

Consider the Single Factor APT