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:

Cash Outflow

Money that is spent or paid out by a business or individual, resulting in a decrease in cash balance.

Financing Activities

Refers to transactions and business events affecting long-term liabilities and equity, including obtaining resources from owners and providing them with a return on their investment.

Bonds Payable

Bonds payable refers to the long-term debt instruments issued by a company to borrow funds, which must be repaid at a specified maturity date.

Issuing

The act of distributing something, such as a company releasing new shares of stock to the public or a government agency providing official documents.