A zero-investment portfolio with a positive expected return arises when _________.
A)an investor has downside risk only
B)the law of prices is not violated
C)the opportunity set is not tangent to the capital allocation line
D)a risk-free arbitrage opportunity exists
E)none of the above

Question

Quizplus · Accepted Answer

A zero-investment portfolio with a positive expected return can only arise when there is a risk-free arbitrage opportunity. This means that an investor can earn a risk-free profit without investing any money, which violates the efficient market hypothesis. Therefore, choice D is the correct answer. Choices A, B, and C are not sufficient conditions for a zero-investment portfolio with a positive expected return.

A Zero-Investment Portfolio with a Positive Expected Return Arises When