Consider the Multifactor Model APT with Three Factors

question 61

Multiple Choice

Consider the multifactor model APT with three factors. Portfolio A has a beta of 0.8 on factor 1, a beta of 1.1 on factor 2, and a beta of 1.25 on factor 3. The risk premiums on the factor 1, factor 2, and factor 3 are 3%, 5%, and 2%, respectively. The risk-free rate of return is 3%. The expected return on portfolio A is __________ if no arbitrage opportunities exist.

• A) 13.5%
• B) 13.4%
• C) 16.5%
• D) 23.0%

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Definitions:

Northern Iron Works

Historic foundries in the Northern United States, significant for their role in the industrialization era.

Separate Peace

An agreement to cease hostilities and settle peace terms independently, often by one party in a wider conflict without the consensus of its allies.

Confederate Nationalism

The patriotic sentiment and cultural identity that developed among the citizens of the Confederate States of America during the American Civil War.

Centralized Power

A form of governance in which all major decisions and authority are concentrated in a central government or authority figure.