Consider the Multifactor APT with Two Factors

question 25

Multiple Choice

Consider the multifactor APT with two factors. The risk premiums on the factor 1 and factor 2 portfolios are 5% and 6%, respectively. Stock A has a beta of 1.2 on factor-1, and a beta of 0.7 on factor-2. The expected return on stock A is 17%. If no arbitrage opportunities exist, the risk-free rate of return is

• A) 6.0%.
• B) 6.5%.
• C) 6.8%.
• D) 7.4%.

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Definitions:

Estrogen Replacement Therapy

A treatment used to alleviate symptoms of menopause by supplementing the body's natural estrogen levels.

Osteoporosis

A medical condition where bones become brittle and fragile from loss of tissue, typically as a result of hormonal changes or deficiency of calcium or vitamin D.

Chondroitin Sulfate

A chemical that is found in the human body and is essential for the maintenance and repair of joint cartilage.

Glucosamine

A natural compound found in cartilage that is commonly used as a dietary supplement for joint health.