Imposing the no-arbitrage condition on a single-factor security market implies which of the following statements? I) The expected return-beta relationship is maintained for all but a small number of well-diversified portfolios.
II) The expected return-beta relationship is maintained for all well-diversified portfolios.
III) The expected return-beta relationship is maintained for all but a small number of individual securities.
IV) The expected return-beta relationship is maintained for all individual securities.
A)I and III
B)I and IV
C)II and III
D)II and IV

Question

Quizplus · Accepted Answer

The no-arbitrage condition in a single-factor model implies that the expected return-beta relationship holds for well-diversified portfolios, but not necessarily for individual securities.

Imposing the No-Arbitrage Condition on a Single-Factor Security Market Implies