Consider the Multifactor APT with Two Factors

question 55

Multiple Choice

Consider the multifactor APT with two factors.The risk premiums on the factor 1 and factor 2 portfolios are 5% and 6%,respectively.Stock A has a beta of 1.2 on factor 1,and a beta of 0.7 on factor 2.The expected return on stock A is 17%.If no arbitrage opportunities exist,the risk-free rate of return is ___________.

• A)6.0%
• B)6.5%
• C)6.8%
• D)7.4%
• E)none of the above

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Definitions:

Exercise Control

The act of directing, managing, or commanding something or someone effectively.

Duty

In a negligence action, an obligation to live up to a reasonable standard.

Gratuitous Bailment

A legal relationship where personal property is voluntarily transferred from one party to another without expectation of payment or benefit.

Equity

Legal principles founded upon fairness, as developed in the Court of Chancery to relieve the harshness of the common law; also the value left in an asset after subtracting what the owner owes.