Question
Security A has a beta of 1.0 and an expected return of 12%. Security B has a beta of 0.75 and an expected return of
Security A has a beta of 1.0 and an expected return of 12%. Security B has a beta of 0.75 and an expected return of 11%. The risk-free rate is 6%. Explain the arbitrage opportunity that exists; explain how an investor can take advantage of it. Give specific details about how to form the portfolio, what to buy and what to sell.
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Investment Analysis and Portfolio Management
Authors: Frank K. Reilly, Keith C. Brown, Sanford J. Leeds
11th Edition
1305262999, 1305262997, 035726164X, 978-1305262997
