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Single factor apt correctly describes returns

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Suppose the single factor APT correctly describes returns.

a) Portfolio A has a beta of 1.2 and an expected return of 10%. Portfolio B has a beta of 0.8 and an expected return of 9%. The risk-free rate of return is 4%. Is there an arbitrage here? If so, what is it? If not, explain why not.

b) According to the APT, if two portfolios have the same beta but different expected returns, arbitrage is possible. Suppose you've identified two such portfolios. If the realization of the factor F turns out to be higher than expected, will you still be able to realise the arbitrage profit?

Explain your answer carefully. You may use a graph, if preferred.

Reference no: EM132999947

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