Consider the Multifactor APT with Two Factors

question 71

Multiple Choice

Consider the multifactor APT with two factors. Stock A has an expected return of 17.6%, a beta of 1.75 on factor 1, and a beta of .86 on factor 2. The risk premium on the factor 1 portfolio is 3.2%. The risk-free rate of return is 5%. What is the risk-premium on factor 2 if no arbitrage opportunities exist?

• A) 8.14%
• B) 3%
• C) 4%
• D) 7.75%

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