CFA Practice Question

There are 119 practice questions for this study session.

CFA Practice Question

Suppose we have two well-diversified portfolios (PA and PB) that are sensitive to the same single factor. The risk-free rate is 2%.

Portfolio | Expected return | Factor sensitivity
A | 0.08 | 2
B | 0.12 | 3

Are there any arbitrage opportunities?
Correct Answer: Yes

For PA: 0.08 = 0.02 + 2 x λ1
λ1 = 0.03

If we use the same λ1 to calculate the expected return of portfolio B: 0.02 + λ1 x 3 = 0.02 + 0.03 x 3 = 11%.

However the expected return for portfolio B is 12%. This means that portfolio B is under-valued or portfolio A is over-valued. There is an arbitrage opportunity in this case.

User Contributed Comments 0

You need to log in first to add your comment.