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 exit?
A)9.26%
B)3%
C)4%
D)7.75%
E)none of the above

Question

Quizplus · Accepted Answer

The correct answer is A.The expected return on stock A can be expressed as:Expected return on stock A = Risk-free rate + Beta_1 * Risk premium on factor 1 + Beta_2 * Risk premium on factor 217.6% = 5% + 1.45 * 3.2% + 0.86 * Risk premium on factor 2Solving for the risk premium on factor 2, we get:Risk premium on factor 2 = (17.6% - 5% - 1.45 * 3.2%) / 0.86 = 9.26%

Consider the Multifactor APT with Two Factors