Consider a Single Factor APT

question 46

Multiple Choice

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, you should take a short position in portfolio __________ and a long position in portfolio _______.

• A) A; A
• B) A; B
• C) B; A
• D) B; B
• E) A; the riskless asset

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Definitions:

Detects

To discover or identify the presence or existence of something.

Carnivores

Animals that primarily eat other animals for food.

Sensory Adaptation

Slowing or cessation of a sensory receptor’s response to an ongoing stimulus.

Stops Paying Attention

The diversion of focus or concentration away from a task or subject, leading to decreased awareness or responsiveness.