Chartered Financial Analyst Level 2
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15 An analyst gathers the following information on the expected return of three well-diversified portfolios and their sensitivity to a single factor:
| Portfolio | Expected Return | Factor Sensitivity |
|-----------|------------------|--------------------|
| X | 5.0% | 0.7 |
| Y | 7.0% | 1.7 |
| Z | 6.0% | 1.3 |
Based on a one-factor arbitrage pricing theory model, an arbitrage opportunity can be exploited by:
A
buying $400 of Portfolio X and $600 of Portfolio Y, and selling short $1,000 of Portfolio Z.
B
buying $500 of Portfolio X and $500 of Portfolio Y, and selling short $1,000 of Portfolio Z.
C
selling short $400 of Portfolio X and $600 of Portfolio Y, and buying $1,000 of Portfolio Z.