Question
Consider a single factor APT. Portfolio A has a beta of 0.5 on the factor and an expected return of 12%. Portfolio B has a
Consider a single factor APT.
Portfolio A has a beta of 0.5 on the factor and an expected return of 12%.
Portfolio B has a beta of 0.4 on the factor and an expected return of 13%.
The risk-free rate of return is 5%.
You want to take advantage of an arbitrage opportunity.
Which of the following is the correct arbitrage strategy?
a.
Invest $1 million in portfolio B; Short-sell $200,000 of the risk-free asset; Short-sell $800,000 of portfolio A
b.
Invest $1 million in the risk-free asset; Short-sell $250,000 of portfolio A; Short-sell $1.25 million of portfolio B
c.
Invest $1 million in portfolio A; Short-sell $250,000 of the risk-free asset; Invest $1.25 million in portfolio B
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