Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of 13%. Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate of return is 10%. 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
C. B; A
A: 13% = 10% + 0.2F; F = 15%;
B: 15% = 10% + 0.4F; F = 12.5%; therefore, short B and take a long position in A.
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