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
E) Only I is correct.

Question

Quizplus · Accepted Answer

In a no-arbitrage single-factor market, the expected return-beta relationship holds for all well-diversified portfolios (II) and for all but a small number of individual securities (III).

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