Consider the Multifactor APT with Two Factors

question 51

Multiple Choice

Consider the multifactor APT with two factors. Stock A has an expected return of 16.4%, a beta of 1.4 on factor 1, and a beta of .8 on factor 2. The risk premium on the factor-1 portfolio is 3%. The risk-free rate of return is 6%. What is the risk-premium on factor 2 if no arbitrage opportunities exist?

• A) 2%
• B) 3%
• C) 4%
• D) 7.75%

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Definitions:

Average Rate of Return

A calculation to determine the profitability of an investment, measuring the average annual return over the investment's lifespan compared to the initial cost.

Estimated Average Annual Income

The projected amount of money one expects to earn on average each year, often used for budgeting and planning purposes.

Average Investment

An approach in accounting that calculates the mean value of various investments held by an entity over a specific period of time.

Capital Investment Analysis

The process of evaluating and comparing potential investments or projects based on their expected returns, costs, and strategic fit with the organization's objectives.