Consider the Multifactor Model APT with Two Factors

question 27

Multiple Choice

Consider the multifactor model APT with two factors. Portfolio A has a beta of 0.75 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor-1 and factor-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) 16.5%
• D) 23.0%

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Definitions:

Point T

In various contexts, this could represent a specific position or moment in time within a graph or study, often marking a significant change or observation.

Scarcity

The basic economic problem that arises because people have unlimited wants but resources are limited, necessitating the allocation of resources.

Unlimited Resources

Access to an infinite amount of materials or assets without any constraints.

Human Wants

The desires and needs of individuals for goods, services, and other intangibles that lead to satisfaction.