Consider the multifactor APT.The risk premiums on the factor 1 and factor 2 portfolios are 5% and 3%,respectively.The risk-free rate of return is 10%.Stock A has an expected return of 19% and a beta on factor 1 of 0.8.Stock A has a beta on factor 2 of ________.
A) 1.33
B) 1.50
C) 1.67
D) 2.00
E) none of these

Question

Quizplus · Accepted Answer

Using the APT, we can calculate the expected return for Stock A as follows:

E(RA) = Rf + β1(RP1) + β2(RP2)

We know that E(RA) = 19%, Rf = 10%, β1 = 0.8, RP1 = 5%, and RP2 = 3% (given in the question).

Substituting these values, we get:

19% = 10% + 0.8(5%) + β2(3%)

Solving for β2, we get:

β2 = (19% - 10% - 0.8(5%)) / 3% = 1.67

Therefore, the answer is C.

Consider the Multifactor APT