Consider the multifactor APT.There are two independent economic factors,F₁ and F₂.The risk-free rate of return is 6%.The following information is available about two well-diversified portfolios: $\begin{array}{l}\begin{array} { l l l l } \text { portfolio}&\beta \text { on F?}&\beta \text { on F?}&\text { expected return}\\A&1.0&2.0&19\%\\B&2.0&0.0&12\%\end{array}\end{array}$
Assuming no arbitrage opportunities exist,the risk premium on the factor F₂ portfolio should be ___________.

Question

Consider the multifactor APT.There are two independent economic factors,F₁ and F₂.The risk-free rate of return is 6%.The following information is available about two well-diversified portfolios:

\begin{array}{l}\begin{array} { l l l l } \text { portfolio}&\beta \text { on F?}&\beta \text { on F?}&\text { expected return}\\A&1.0&2.0&19\%\\B&2.0&0.0&12\%\end{array}\end{array}

Assuming no arbitrage opportunities exist,the risk premium on the factor F₂ portfolio should be ___________.

Quizplus · Accepted Answer

Using the APT model, we can set up the equations for the expected returns of portfolios A and B and solve for the risk premiums. Solving these equations shows that the risk premium on factor F2 is 5%.

Consider the Multifactor APT Assuming No Arbitrage Opportunities Exist,the Risk Premium on the Factor