Consider the one-factor APT. The standard deviation of returns on a well-diversified portfolio is 14%. The standard deviation on the factor portfolio is 10%. The beta of the well-diversified portfolio is approximately
A) 0.80.
B) 1.40.
C) 1.65.
D) 1.82.

Question

Quizplus · Accepted Answer

The beta of a portfolio in the context of the Arbitrage Pricing Theory (APT) is calculated as the ratio of the portfolio's standard deviation to the standard deviation of the factor, multiplied by the correlation coefficient between the portfolio and the factor. For a well-diversified portfolio, the correlation with the factor is assumed to be 1. Therefore, the beta is calculated as the standard deviation of the portfolio (14%) divided by the standard deviation of the factor (10%), which equals 1.40.

Consider the One-Factor APT