Consider the single factor APT.Portfolios A and B have expected returns of 14% and 18%,respectively.The risk-free rate of return is 7%.Portfolio A has a beta of 0.7.If arbitrage opportunities are ruled out,portfolio B must have a beta of __________.
A)0.45
B)1.00
C)1.10
D)1.22
E)none of the above

Question

Quizplus · Accepted Answer

According to the single factor APT, the expected return of a portfolio is determined by the risk-free rate plus the product of the portfolio's beta and the risk premium. For Portfolio A: 14% = 7% + 0.7 * (Risk Premium). Solving gives a Risk Premium of 10%. For Portfolio B: 18% = 7% + Beta * 10%. Solving for Beta gives Beta = 1.10.

Consider the Single Factor APT