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 9%.If a hedge fund manager wants to take advantage of an arbitrage opportunity,she should take a short position in portfolio __________ and a long position in portfolio __________.

Question

Quizplus · Accepted Answer

Portfolio A has a higher beta and expected return than portfolio B, so it is more risky. The hedge fund manager should take a short position in portfolio A and a long position in portfolio B to take advantage of the arbitrage opportunity.

Portfolio a Has a Beta of 1