Security A is estimated to be linearly related to four risk factors: F₁, F₂, F₃, and F₄ such that its required rate of return can be expressed as ER_(A) = m_o + n₁F₁ + n₂F₂ + n₃F₃ + n₄F₄, where m_o is the risk-free rate.If the risk-free rate is 5.5 %, what is the required rate of return of Security A, where n₁, n₂, n₃, and n₄ are 0.3, 0.6, 0.9, and 0.12, respectively, and F₁, F₂, F₃, and F₄ are 6 %, 7 %, 10 %, and 8 %, respectively? A)19.22% B)21.46% C)22.90% D)27.11%

Question

Quizplus · Accepted Answer

Required rate of return of Security A = m + n1(F₁) + n2(F₂) + n3(F₃) + n4(F₄) m (risk-free rate) = 5.5% n1 = 0.3, F₁ = 6% n2 = 0.6, F₂ = 7% n3 = 0.9, F₃ = 10% n4 = 0.12, F₄ = 8% Required rate of return of Security A = 5.5% + 0.3(6%) + 0.6(7%) + 0.9(10%) + 0.12(8%) = 21.46% Therefore, the best choice is B.

Security a Is Estimated to Be Linearly Related to Four