Consider a one-factor economy.Portfolio A has a beta of 1.0 on the factor and portfolio B has a beta of 2.0 on the factor.The expected returns on portfolios A and B are 11% and 17%, respectively.Assume that the risk-free rate is 6% and that arbitrage opportunities exist.Suppose you invested $100,000 in the risk-free asset, $100,000 in portfolio B, and sold short $200,000 of portfolio A.Your expected profit from this strategy would be
A)-$1,000.
B)$0.
C)$1,000.
D)$2,000.

Question

Quizplus · Accepted Answer

$100,000(0.06) = $6,000 (risk-free position); $100,000(0.17) = $17,000 (portfolio B); -$200,000(0.11) = -$22,000 (short position, portfolio A); 1,000 profit.

Consider a One-Factor Economy