Consider the Multifactor APT with Two Factors

question 39

Multiple Choice

Consider the multifactor APT with two factors. Stock A has an expected return of 17.6%, a beta of 1.45 on factor 1, and a beta of .86 on factor 2. The risk premium on the factor 1 portfolio is 3.2%. The risk-free rate of return is 5%. What is the risk-premium on factor 2 if no arbitrage opportunities exist?

• A) 9.26%
• B) 3%
• C) 4%
• D) 7.75%

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Definitions:

Class Analysis

The study of the social and economic divisions within society, particularly regarding social class and inequality.

Stratification

The arrangement or classification of society into layers or classes based on factors like wealth, occupation, or race.

Sociology

The systematic study of human behavior in social context.

Poverty Threshold

The minimum level of income deemed adequate in a particular country to live on; used to identify who is considered to be living in poverty.