Consider the Multi-Factor APT with Two Factors

question 71

Multiple Choice

Consider the multi-factor APT with two factors.Portfolio A has a beta of 0.5 on factor 1 and a beta of 1.25 on factor 2.The risk premiums on the factors 1 and 2 portfolios are 1% and 7% respectively.The risk-free rate of return is 7%.The expected return on portfolio A is __________ if no arbitrage opportunities exist.

• A) 13.5%
• B) 15.0%
• C) 16.25%
• D) 23.0%

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Definitions:

Boeing

A global American corporation engaged in designing, manufacturing, and selling airplanes, rotorcraft, rockets, satellites, missiles, and telecommunications equipment around the world.

Random Walk

A theory suggesting that the price movements of securities are unpredictable and random, making it impossible to consistently predict their future movements based on past trends.

Stock Prices

The current market price at which a share of a company is bought or sold.

Price Changes

Adjustments in the price levels of goods, services, or securities in the market.