Consider the multifactor APT with two factors. Stock A has an expected return of 17.6%, a beta of 1.45 on factor 1, and a beta of .86 on factor 2. The risk premium on the factor 1 portfolio is 3.2%. The risk-free rate of return is 5%. What is the risk-premium on factor 2 if no arbitrage opportunities exist?
A) 9.26%
B) 3%
C) 4%
D) 7.75%

Question

Quizplus · Accepted Answer

17.6% = 1.45(3.2%) + 0.86x + 5%; x = 9.26.

Consider the Multifactor APT with Two Factors