Assume the following data for a stock: Risk-free rate = 4%; Factor-1 beta = 1.5; Factor-2 beta = 0.5; Factor-1 risk-premium = 8%; Factor-2 risk-premium = 2%.Calculate the expected rate of return on the stock using a two-factor APT model.
A)14%
B)17%
C)10%
D)13%

Question

Quizplus · Accepted Answer

The expected rate of return using the two-factor APT model is calculated as: Risk-free rate + (Factor-1 beta * Factor-1 risk-premium) + (Factor-2 beta * Factor-2 risk-premium) = 4% + (1.5 * 8%) + (0.5 * 2%) = 4% + 12% + 1% = 17%.

Assume the Following Data for a Stock: Risk-Free Rate =