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