Consider the Multifactor APT Assuming No Arbitrage Opportunities Exist,the Risk Premium on the Factor

question 74

Multiple Choice

Consider the multifactor APT.There are two independent economic factors,F₁ and F₂.The risk-free rate of return is 6%.The following information is available about two well-diversified portfolios: $$\begin{array}{l}\begin{array} { l l l l } \text { portfolio}&\beta \text { on F?}&\beta \text { on F?}&\text { expected return}\\A&1.0&2.0&19\%\\B&2.0&0.0&12\%\end{array}\end{array}$$
Assuming no arbitrage opportunities exist,the risk premium on the factor F₁ portfolio should be __________.

• A) 3%
• B) 4%
• C) 5%
• D) 6%
• E) none of these

---

Definitions:

Gelled Engine Oil

Refers to engine oil that has thickened into a semi-solid state, often due to low temperatures.

Flywheel Ring Gear

A gear attached around the circumference of the flywheel in an internal combustion engine, engaged by the starter motor to start the engine.

Neutral Safety Switch

A safety switch located in the control circuit of a cranking system designed to prevent engine cranking when an automatic transmission is in gear.

Open Circuit

An electrical circuit that is not energized, that is, no current is flowing. The opposite to a closed circuit.