Portfolio a Has a Beta of 1

question 48

Multiple Choice

Portfolio A has a beta of 1.3 and an expected return of 21%.Portfolio B has a beta of 0.7 and an expected return of 17%.The risk-free rate of return is 9%.If a hedge fund manager wants to take advantage of an arbitrage opportunity,she 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

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Definitions:

Systematic Desensitization

A behavioral therapy technique used to reduce phobias or anxiety through gradual exposure to the feared object or situation while employing relaxation techniques.

Nausea-producing Drug

A medication that induces the sensation of wanting to vomit as a side effect.

Aversive Conditioning

A learning process in which an individual's behavior is modified by pairing an unwanted stimulus with a specific response to create an aversion to that behavior.

Behavior Modification

The use of learning techniques, such as reinforcement or punishment, to change or mold behavior towards a desired outcome.