Suppose that you have access to two funds. Fund 1 has a CAPM beta of 0.4, Fund 2 has a CAPM beta of 1.9. Fund 1 has an average return of 8.5% and Fund 2 has an average return of 10.5%. The riskless rate is 5% and the market risk premium is 7%. You would like to construct a Betting-against-Beta (BaB) strategy by levering up Fund 1 and delevering Fund 2 so that both have a beta of 1.75. Assume that you can borrow and lend at the riskless rate.

What is the expected return on the zero-cost strategy long in levered Fund 1 and short in delevered Fund 2?

	A.	8.00%
	B.	4.39%
	C.	2.93%
	D.	10.25%