Question
Portfolio A has a beta of 0.6 and an expected return of 12%. Portfolio B has a beta of 1.2 and an expected return of
Portfolio A has a beta of 0.6 and an expected return of 12%. Portfolio B has a beta of 1.2 and an expected return of 20%. The risk-free rate of return is 8%. Does an arbitrage opportunity exist? If so, how could you take advantage of it? (Assume that the borrowing rate is the risk-free rate.)
Group of answer choices
Yes, buy $X portfolio A, short $2X portfolio B, and invest $X in the risk free asset
Yes, buy $X portfolio B, short $2X portfolio A, and invest $X in the in the risk free asset
Yes, buy $2X portfolio B, short $X portfolio A, and borrower $X from a bank
Yes, buy $2X portfolio A, short $X portfolio B, and borrow $X from the bank
No.
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