Consider the Multifactor APT with Two Factors

question 2

Multiple Choice

Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is ________ if no arbitrage opportunities exist.

• A) 13.5%
• B) 15%
• C) 16.25%
• D) 23%

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