Consider the Multifactor APT with Two Factors

question 60

Multiple Choice

Consider the multifactor APT with two factors. Stock A has an expected return of 14%, a beta of 1.2 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 4%. What is the risk-premium on factor 2 if no arbitrage opportunities exist?

• A) 2%
• B) 4%
• C) 6%
• D) 8%

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Definitions:

Phrenology

A now-discredited theory that suggested the shape and size of the skull could determine a person's personality and mental abilities.

Joseph Gall

An early 19th-century neuroanatomist and physiologist known for developing phrenology, the study of skull shapes to determine mental faculties.

Lesion Method

A research technique involving the study of the effects of brain damage on behavior and mental processes.

Human Participants

Individuals who take part in research studies or experiments, often to provide data on human behavior, cognition, or physiology.