Consider the multifactor model APT with two factors. Portfolio A has a beta of 1.20 on factor 1 and a beta of 1.50 on factor 2. The risk premiums on the factor-1 and factor-2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 4%. The expected return on portfolio A is __________ if no arbitrage opportunities exist.
A) 13.5%
B) 15.0%
C) 15.7%
D) 23.0%

Question

Quizplus · Accepted Answer

The expected return on portfolio A according to the Arbitrage Pricing Theory (APT) is calculated as follows: Expected Return = Risk-free rate + (Beta1 * Risk Premium1) + (Beta2 * Risk Premium2) = 4% + (1.20 * 1%) + (1.50 * 7%) = 4% + 1.2% + 10.5% = 15.7%.

Consider the Multifactor Model APT with Two Factors