Suppose in a Single Factor APT Model, Portfolio a Has

question 27

Multiple Choice

Suppose in a single factor APT model, portfolio A has a beta of 1.3 and expected returns of 21%. Portfolio B has a beta of 0.7 and returns of 17%. The risk free rate is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio _________ and a long position in _____.

• A) A, A
• B) A, B
• C) B, A
• D) B, B

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Definitions:

Uncollectible Account

An account receivable that a company deems unlikely to be collected and thus writes off as a bad debt expense.

Net Income

The total earnings of a company after subtracting all expenses from revenue, representing the profit made in a given period.

Working Capital

The difference between a company's current assets and current liabilities, indicating the liquidity available for running day-to-day operations.

Historical Relationship

Patterns or linkages identified through the analysis of past data, often used for forecasting future trends or dynamics.