Consider the One-Factor APT

question 1

Multiple Choice

Consider the one-factor APT. Assume that two portfolios, A and B, are well diversified. The betas of portfolios A and B are 1.0 and 1.5, respectively. The expected returns on portfolios A and B are 19% and 24%, respectively. Assuming no arbitrage opportunities exist, the risk-free rate of return must be

• A) 4.0%.
• B) 9.0%.
• C) 14.0%.
• D) 16.5%.

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Definitions:

Stagflation

An economic condition characterized by stagnant economic growth, high unemployment, and high inflation.

Price Level

The economy’s general price level across its full range of goods and services.

Short-run Equilibrium

A state in which market supply and demand balance each other, and, as a result, prices become stable temporarily.

Global Pollution

Environmental damage that crosses international borders, affecting air, water, and land on a worldwide scale.