Consider a single factor APT.Portfolio A has a beta of 2.0 and an expected return of 22%.Portfolio B has a beta of 1.5 and an expected return of 17%.The risk-free rate of return is 4%.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 offers a higher return per unit of risk (beta) compared to Portfolio B. Therefore, you should short Portfolio B and go long on Portfolio A to exploit the arbitrage opportunity.

Consider a Single Factor APT