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%
E) none of these

Question

Quizplus · Accepted Answer

Using the one-factor APT formula: Expected Return = Risk-Free Rate + Beta * (Market Risk Premium). For portfolio A: 19% = Risk-Free Rate + 1.0 * (Market Risk Premium). For portfolio B: 24% = Risk-Free Rate + 1.5 * (Market Risk Premium). Solving these equations simultaneously gives a Risk-Free Rate of 9%.

Consider the One-Factor APT