Consider the multifactor APT with two factors.Stock A has an expected return of 16.4%,a beta of 1.4 on factor 1 and a beta of .8 on factor 2.The risk premium on the factor 1 portfolio is 3%.The risk-free rate of return is 6%.What is the risk-premium on factor 2 if no arbitrage opportunities exit?
A) 2%
B) 3%
C) 4%
D) 7.75%
E) none of these

Question

Quizplus · Accepted Answer

The risk premium on factor 2 is 4%. This can be calculated using the formula:Risk premium on factor 2 = Expected return on stock A - (Risk-free rate + Beta of stock A on factor 1 * Risk premium on factor 1 + Beta of stock A on factor 2 * Risk premium on factor 2)16.4% - (6% + 1.4 * 3% + 0.8 * Risk premium on factor 2) = 4%

Consider the Multifactor APT with Two Factors