Consider a one-factor economy.Portfolio A has a beta of 1.0 on the factor and portfolio B has a beta of 2.0 on the factor.The expected returns on portfolios A and B are 11% and 17%,respectively.Assume that the risk-free rate is 6% and that arbitrage opportunities exist.Suppose you invested $100,000 in the risk-free asset,$100,000 in portfolio B,and sold short $200,000 of portfolio A.Your expected profit from this strategy would be ______________.
A)-$1,000
B)$0
C)$1,000
D)$2,000
E)none of the above

Question

Quizplus · Accepted Answer

The expected profit from the strategy is $1,000. The strategy involves borrowing $200,000 at the risk-free rate (6%) to invest in portfolio B and the risk-free asset, while shorting portfolio A. The expected return from the strategy is calculated as follows: $100,000 * 6% + $100,000 * 17% - $200,000 * 11% = $1,000.

Consider a One-Factor Economy