Based on the sensitivities to real GDP and inflation of 0.75 and 1.25, McCracken would calculate the expected return for the Orb Large Cap Fund to be:
expected return = RF + 0.08 × 0.75 + 0.02 × 1.25 = RF + 8.5%
Therefore, Kwon’s fundamental analysis estimate is congruent with McCracken’s APT estimate. If we assume that both Kwon’s and McCracken’s estimates of the return of Orb’s High Growth Fund are accurate, then no arbitrage profit is possible. Had Kwon provided an estimate of the Orb Large Cap Fund’s expected return that was less than 8.5 percent, for example, then we would consider selling that fund short and purchasing the High Growth Fund with the proceeds
