and the risk-free rate is 8%.   olio Expected Return Beta   1.00 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. 14. According to the theory of arbitrage: a. High-beta stocks are consistently overpriced. b. Low-beta stocks are consistently overpriced. c. Positive alpha investment opportunities will quickly disappear. d. Rational investors will pursue arbitrage consistent with their risk tolerance. 15. A zero-investment portfolio with a positive alpha could arise if: a. The expected return of the portfolio equals zero. b. The capital market line is tangent to the opportunity set. c. The law of one price remains unviolated. d. A risk-free arbitrage opportunity exists. 16. The arbitrage pricing theory (APT) differs from the single-factor capital asset pricing model (CAPM) because the APT: a. Places more emphasis on market risk. b. Minimizes the importance of diversification. c. Recognizes multiple unsystematic risk factors. d. Recognizes multiple systematic risk factors. 17. An investor takes as large a position as possible when an equilibrium price relationship is violated. This is an example of: a. A dominance argument. b. The mean-variance efficient frontier. c. Arbitrage activity. d. The capital asset pricing model. 18. The feature of arbitrage pricing theory (APT) that offers the greatest potential advan- tage over the simple CAPM is the: a. Identification of anticipated changes in production, inflation, and term structure of interest rates as key factors explaining the risk-return relationship. b. Superior measurement of the risk-free rate of return over historical time periods. c. Variability of coefficients of sensitivity to the APT factors for a given asset