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

Question

Quizplus · Accepted Answer

Expected rate of return = Risk-free rate + (Factor-1 beta x Factor-1 risk premium) + (Factor-2 beta x Factor-2 risk premium)
= 4% + (1.5 x 8%) + (0.5 x 2%)
= 12% + 1%
= 13%
Therefore, the expected rate of return on the stock using a two-factor APT model is 17%.

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