Expected return on a portfolio with a beta

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Consider a single factor APT. Portfolio A has a beta of 1.5 and an expected return of 11%. Portfolio B has a beta of 0.5 and an expected return of 5%.

- Would an arbitrage opportunity exist if the risk-free rate of return is 4%? If so, what would the arbitrage strategy be (i.e., how would you construct the arbitrage portfolio with Portfolio A, Portfolio B and T-bills)?

- In equilibrium, what must be the expected return on a portfolio with a beta of 1.2 in this economy?

Reference no: EM133000191

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