Question 4 Consider the following single factor APT model, p = 0.04 + 0.08p. The risk pre- mium on a portfolio with unit sensitivity is 8%. The risk-free rate is 4%. You have uncovered three well-diversified portfolios with the following characteristics. Portfolio B 0.8 Expected Return Rp 0.104 0.100 0.136 a) Which of these portfolios is not in line with the APT? (10 Marks) b) Suppose you cannot lend or borrow at the risk-free rate. How would you exploit arbitrage opportunity using the three portfolios above? What is the profit? (20 Marks) c) Now consider you can trade the risk-free asset and there are no short-selling constraints. How would you exploit the arbitrage opportunity using the three portfolios above? What is the profit? (20 Marks) (Show all working) Total (50 Marks) Question 4 Consider the following single factor APT model, p = 0.04 + 0.08p. The risk pre- mium on a portfolio with unit sensitivity is 8%. The risk-free rate is 4%. You have uncovered three well-diversified portfolios with the following characteristics. Portfolio B 0.8 Expected Return Rp 0.104 0.100 0.136 a) Which of these portfolios is not in line with the APT? (10 Marks) b) Suppose you cannot lend or borrow at the risk-free rate. How would you exploit arbitrage opportunity using the three portfolios above? What is the profit? (20 Marks) c) Now consider you can trade the risk-free asset and there are no short-selling constraints. How would you exploit the arbitrage opportunity using the three portfolios above? What is the profit? (20 Marks) (Show all working) Total (50 Marks)