Question: Consider a single factor APT. Portfolio A has a beta of 1.0 and an expected return of 16%. Portfolio B has a beta of 0.8

  1. Consider a single factor APT. Portfolio A has a beta of 1.0 and an expected return of 16%. Portfolio B has a beta of 0.8 and an expected return of 12%. The risk-free rate of return is 6%. If you wanted to take advantage of an arbitrage opportunity, what do you do? if the short position is in the portfolio overpriced security and the long position is in the arbitrage portfolio, what is the composition of the arbitrage portfolio?

Consider the following data for a one-factor economy. All portfolios are well diversified.

PortfolioExpected Return ,Beta

A 12.0% 1.05

B 4.0% 0

C 9.5% 0.80

Does an arbitrage opportunity exist? What would the arbitrage strategy be?

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