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Concentrated equity portfolio of value-oriented stocks

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You manage a concentrated equity portfolio of value-oriented stocks. Over the past five years your portfolio has returned 6.5% p.a. with a beta of .7 and an annualized volatility of 10%. The equity market benchmark has returned 7.5% p.a. with an annualized volatility of 14%, while the risk-free rate was 2%.

(i) You mention to your friend your portfolio has generated alpha over the past five years and he tells you there would be an arbitrage opportunity if you took a 70% short position in the market and against your portfolio and finance the remaining 30% of your investment at the risk-free rate. Is he correct? Why or why not?

Reference no: EM132826081

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