Consider the Multifactor Model APT with Three Factors

question 61

Multiple Choice

Consider the multifactor model APT with three factors. Portfolio A has a beta of 0.8 on factor 1, a beta of 1.1 on factor 2, and a beta of 1.25 on factor 3. The risk premiums on the factor 1, factor 2, and factor 3 are 3%, 5%, and 2%, respectively. The risk-free rate of return is 3%. The expected return on portfolio A is __________ if no arbitrage opportunities exist.

• A) 13.5%
• B) 13.4%
• C) 16.5%
• D) 23.0%

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