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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Definitions:

ADP

Adenosine Diphosphate (ADP) is an important organic compound in metabolism that serves as an energy transfer molecule. ADP is converted to ATP, which stores and transfers energy within cells.

Energy Currency

This refers to molecules like adenosine triphosphate (ATP) that store and transfer energy within cells, fueling various biological processes.

Reactant

Substance that participates in a reaction.

Product

An item or substance that is manufactured or refined for sale.