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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Definitions:

Working Capital

The measure of a company's liquidity, efficiency, and its short-term financial health, calculated as current assets minus current liabilities.

Externalities

Costs or benefits that affect parties who did not choose to incur that cost or benefit, often related to environmental, public health, or economic activities.

Net Present Value (NPV)

A calculation used to assess the profitability of an investment, measuring the difference between the present value of its cash inflows and outflows.

Internal Rate of Return (IRR)

The rate of growth a project is expected to generate, calculated as the discount rate that makes the net present value (NPV) of all cash flows equal to zero.