Question

Consider the single factor APT. Portfolio A has a beta of 0.5 and an expected return of 12%. Portfolio B has a beta of 0.4 and an expected return of 13%. The risk-free rate of return is 5%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio _________ and a long position in portfolio _________.

Answer 1

For A -

Beta = 0.5 and Expected return = 18%

12% = 0.5F+5%

F = 14%

For B -

Beta = 0.4 and Expected return = 13%

13% = 0.4F+5%

F = 20%

Hence, short the position in portfolio 14% and long position in portfolo 20%

Consider the single factor APT. Portfolio A has a beta of 0.5 and an expected return of 12%. Portfolio B has a beta of 0.4 and an expected return of 13%. The risk-free rate of return is 5%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio ____A_____ and a long position in portfolio ____B____