Suppose a sizeable,fully diversified portfolio has an F₁ beta of .9,an F₂ beta of 1.4,and an expected return of 11.6 percent.If F₁ turns out to be 1.1 percent and F₂ is −.8 percent,what will be the actual rate of return based on a two-factor arbitrage pricing model? A)12.05 percent B)11.47 percent C)11.72 percent D)12.32 percent E)12.58 percent

Question

Quizplus · Accepted Answer

The actual rate of return is calculated using the formula: Expected Return + (Beta1 * (F1 - Expected F1)) + (Beta2 * (F2 - Expected F2)). Here, Expected Return = 11.6%, Beta1 = 0.9, Beta2 = 1.4, F1 = 1.1%, F2 = -0.8%. Assuming expected F1 and F2 are 0, the calculation is: 11.6% + (0.9 * 1.1%) + (1.4 * -0.8%) = 11.6% + 0.99% - 1.12% = 11.47%.

Suppose a Sizeable,fully Diversified Portfolio Has an F1 Beta of .9,an

Suppose a Sizeable,fully Diversified Portfolio Has an F₁ Beta of .9,an