Assume that both X and Y are well-diversified portfolios and the risk free rate is 8%. Portfolio X has an expected return of 14% and a beta 1. Portfolio Y has an expected return of 9,5% and beta 0,25. In this situation, you would conclude that portfolios X and Y________________
a. Are in equilibrium
b. Offer an arbitrage opportunity
c. Are both underpriced
d. Are both fairly priced
e. Are both overpriced
Since both portfolios are well diversified, the expected return on these portfolios should follow the CAPM.
Expected return on these portfolios is assessed clearly in the solution.