Consider the one-factor APT. Assume that two portfolios, A and B, are well diversified. The betas of portfolios A and B are 1.0 and 1.5, respectively. The expected returns on portfolios A and B are 19% and 24%, respectively. Assuming no arbitrage opportunities exist, the risk-free rate of return must be
A) 4.0%.
B) 9.0%.
C) 14.0%.
D) 16.5%.

Question

Quizplus · Accepted Answer

The expected return on a portfolio in the one-factor APT is given by the formula: Expected Return = Risk-Free Rate + Beta * (Market Risk Premium). Using the given data for portfolios A and B, we can set up two equations and solve for the risk-free rate. Solving these equations shows that the risk-free rate is 9.0%.

Consider the One-Factor APT