Considerthemulti-factorAPT.Therearetwoindependenteconomicfactors,F1andF2.Therisk-freerateofreturnis2%.Thefollowinginformationisavailableabouttwowell-diversifiedportfolios: Portfolio betaonF1 betaonF2 ExpectedReturn A 2.0 2.0 20 % B
Question:
Consider the multi-factor APT. There are two independent economic factors, F1 and F2. The risk-free rate of return is 2%. The following information is available about two well-diversified portfolios:
Portfolio beta on F1 beta on F2 Expected Return
A 2.0 2.0 20 %
B 1.0 1.0 12 %
Which statement below about the arbitrage is correct?
Select one:
A.
There is no arbitrage opportunity.
B.
There is no sufficient information.
C.
A trading strategy long the risk-free asset, long portfolio A and short portfolio B is able to generate arbitrage profit.
D.
A trading strategy long the risk-free asset, short portfolio A and long portfolio B is able to generate arbitrage profit.
E.
A trading strategy short the risk-free asset, short portfolio A and long portfolio B is able to generate arbitrage profit.