Consider the Multifactor APT Assuming No Arbitrage Opportunities Exist, the Risk Premium on the F₁

question 64

Multiple Choice

Consider the multifactor APT. There are two independent economic factors, F₁ and F₂. The risk-free rate of return is 6%. The following information is available about two well-diversified portfolios: $$\begin{array} { c c c c } \text { Portfolio } & \beta \text { on } \mathrm { F } _ { 1 } & \beta \text { on } \mathrm { F } _ { 2 } & \begin{array} { c } \text { Expected } \\\text { Return }\end{array} \\\text { A } & 1.0 & 2.0 & 19 \% \\\text { B } & 2.0 & 0.0 & 12 \% \\\hline\end{array}$$ Assuming no arbitrage opportunities exist, the risk premium on the factor F₁ portfolio should be

• A) 3%.
• B) 4%.
• C) 5%.
• D) 6%.

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Capital Expenditure

Funds spent by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment.

Working Capital Management

Planning and managing the firm’s current assets and liabilities.

Inventory

Raw materials, work-in-progress, and finished goods that are considered assets and intended for sale in the ordinary course of business.

Capital Structure

The mix of a company's long-term debt, specific short-term debt, common equity, and preferred equity that it uses to finance its overall operations and growth.