Consider the multi-factor APT with two factors.Portfolio A has a beta of 0.5 on factor 1 and a beta of 1.25 on factor 2.The risk premiums on the factors 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) 15.0%
C) 16.25%
D) 23.0%

Question

Quizplus · Accepted Answer

Using the multi-factor APT, the expected return on portfolio A is calculated as follows:

Expected return on portfolio A = risk-free rate of return + (beta 1 x risk premium 1) + (beta 2 x risk premium 2)
Expected return on portfolio A = 7% + (0.5 x 1%) + (1.25 x 7%)
Expected return on portfolio A = 7% + 0.5% + 8.75%
Expected return on portfolio A = 16.25%

Therefore, the correct answer is C) 16.25%.

Consider the Multi-Factor APT with Two Factors