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
E)none of the above

Question

Quizplus · Accepted Answer

According to the APT, portfolios with the same expected return but different betas should have a linear relationship with their expected returns. However, in this case, Portfolio B has a lower beta and a higher expected return than Portfolio A, which is inconsistent with the APT. This creates an arbitrage opportunity. To take advantage of this, an investor should short sell Portfolio A, which has a lower expected return but a higher beta, and go long on Portfolio B, which has a higher expected return but a lower beta. Therefore, the correct choice is to take a short position in portfolio A and a long position in portfolio B.

Consider the Single Factor APT