Consider a Well-Diversified Portfolio, A, in a Two-Factor Economy

question 39

Multiple Choice

Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 6%, the risk premium on the first factor portfolio is 4%, and the risk premium on the second factor portfolio is 3%. If portfolio A has a beta of 1.2 on the first factor and .8 on the second factor, what is its expected return?

• A) 7.0%
• B) 8.0%
• C) 9.2%
• D) 13.0%
• E) 13.2%

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Definitions:

Quantity Axis

A graphical representation element used in economics to indicate quantities, such as quantities of goods produced or sold.

Marginal Revenue

The extra revenue earned from the sale of an additional unit of a product or service.

Maximize Profits

The process by which a firm adjusts its production and pricing strategies to earn the highest possible profit.

Economic Profits

Profits calculated by subtracting both the explicit and implicit costs of production from total revenues.