Consider the single factor APT.Portfolio A has a beta of 1.3 and an expected return of 21%.Portfolio B has a beta of 0.7 and an expected return of 17%.The risk-free rate of return is 8%.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 higher beta than portfolio B, which means that it is more sensitive to changes in the market. Therefore, portfolio A is expected to have a higher return than portfolio B. However, the expected return of portfolio A is only 21%, while the expected return of portfolio B is 17%. This means that there is an arbitrage opportunity to take a short position in portfolio A and a long position in portfolio B.

Consider the Single Factor APT