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 of 1. Portfolio Y has an expected return of 9.5% and a beta of .25. In this situation, you would conclude that portfolios X and Y .A. are in equilibriumB. offer an arbitrage opportunityC. are both underpricedD. are both fairly priced

The correct option is A, Portfolios X and Y are in equilibrium

Explanation:

Adopting Miller and Modgiliani Capital Asset Pricing Model formula, the return on both portfolios can be determined:

Expected return=Risk free return+Beta(Market return-Risk free return)

Portfolio X:

Risk free return=8%

Beta=1.0

Expected return=14%

Let market return be MR

14%=8%+1.0(MR-8%)

14%-8%=1.0*(MR-8%)

6%=MR-8%

MR=6%+8%

MR=14%

Portfolio Y:

Risk free return=8%

Beta=0.25

Expected return=9.5%

let market return be MR

9.5%=8%+0.25(MR-8%)

9.5%-8%=0.25MR-2%

1.5%=0.25MR-2%

1.5%+2%=0.25MR

0.25MR=3.5%

MR=3.5%/0.25

MR=14%

Hence both portfolios are at equilibrium since they have the same market return

hardwork and determination

answer; /// i believe that the correct answer is (b) money set aside for emergency repairs;