Suppose you are working with two factor portfolios,Portfolio 1 and Portfolio 2.The portfolios have expected returns of 15% and 6%,respectively.Based on this information,what would be the expected return on well-diversified portfolio A,if A has a beta of 0.80 on the first factor and 0.50 on the second factor? The risk-free rate is 3%.
A)15.2%
B)14.1%
C)13.3%
D)10.7%
E)8.4%

Question

Quizplus · Accepted Answer

The expected return on a well-diversified portfolio A can be calculated using the following formula:
E(RA) = RF + β1[E(R1) - RF] + β2[E(R2) - RF]
where RF is the risk-free rate, β1 and β2 are the betas on the first and second factors, and E(R1) and E(R2) are the expected returns on the two factor portfolios.
Plugging in the given values, we get:
E(RA) = 0.03 + 0.80[0.15 - 0.03] + 0.50[0.06 - 0.03] = 0.141 or 14.1%
Therefore, the best choice is B.

Suppose You Are Working with Two Factor Portfolios,Portfolio 1 and Portfolio