Consider the Multifactor APT with Two Factors

question 51

Multiple Choice

Consider the multifactor APT with two factors. Stock A has an expected return of 16.4%, a beta of 1.4 on factor 1, and a beta of .8 on factor 2. The risk premium on the factor-1 portfolio is 3%. The risk-free rate of return is 6%. What is the risk-premium on factor 2 if no arbitrage opportunities exist?

• A) 2%
• B) 3%
• C) 4%
• D) 7.75%

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Definitions:

Collusion

A non-competitive secret or illegal agreement between rivals that attempts to disrupt the market's equilibrium by influencing the market mechanism such as price or output of goods and services.

Economic Recession

A period of significant decline in total output, income, employment, and trade in an economy, usually lasting from six months to a year.

Gentlemen's Agreements

Informal, non-binding agreements based on trust, honor, and the integrity of the parties, without any written documentation.

Cartel

An agreement among competing firms to control prices or limit production in a sector, often to maximize profits at the expense of consumers.