Consider the multifactor model APT with two factors.Portfolio A has a beta of 0.75 on factor 1 and a beta of 1.25 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 7%.The expected return on portfolio A is __________ if no arbitrage opportunities exist.
A) 13.5%
B) 15.0%
C) 16.5%
D) 23.0%
E) none of these

Question

Quizplus · Accepted Answer

The expected return on portfolio A is calculated using the formula: Expected Return = Risk-free rate + (Beta1 * Risk Premium1) + (Beta2 * Risk Premium2). Substituting the given values: 7% + (0.75 * 1%) + (1.25 * 7%) = 7% + 0.75% + 8.75% = 16.5%.

Consider the Multifactor Model APT with Two Factors