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

question 49

Multiple Choice

Consider the multifactor APT. There are two independent economic factors, F₁and F₂. The risk-free rate of return is 6%. The following information is available about two well-diversified portfolios: $$\begin{array} { | l | l | l | l | } \hline \underline { \text { Portfolio } } & \underline { B \text { on } } \mathbf { E } \underline { 1 } & \underline { \beta \text { on } } \mathrm { F } _ { 2 } & \underline { \text { Expected Return } } \\\hline \mathrm { A } & 1.0 & 2.0 & 19 \% \\\hline \mathrm { B } & 2.0 & 0.0 & 12 \% \\\hline\end{array}$$
-Assuming no arbitrage opportunities exist,the risk premium on the factor F₂ portfolio should be ___________.

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

---

Definitions:

Variance

Variance is a measure of the dispersion of a set of data points from their mean, indicating how spread out the data points are.

Geometric Mean

A type of mean or average which indicates the central tendency of a set of numbers by using the product of their values.

Investment

The action of allocating resources, usually money, with the expectation of generating an income or profit.

Geometric Mean

A type of mean or average, which indicates the central tendency of a set of numbers by using the product of their values and is particularly useful for proportional growth rates.