Consider the single-factor APT. Stocks A and B have expected returns of 12% and 19%, respectively. The risk-free rate of return is 3%. Stock B has a beta of 1.2. If arbitrage opportunities are ruled out, stock A has a beta of
A) 0.47.
B) 1.00.
C) 1.30.
D) 1.69.
E) 0.75.

Question

Quizplus · Accepted Answer

The single-factor APT (Arbitrage Pricing Theory) formula is: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Given that there are no arbitrage opportunities, we can set up equations for both stocks A and B based on their expected returns, betas, and the risk-free rate. For Stock B, we have 19% = 3% + 1.2 * (Market Return - 3%). Solving for Market Return gives us 16.67%. Using this Market Return in the formula for Stock A, we can solve for Stock A's beta, which results in a beta of approximately 0.47.

Consider the Single-Factor APT