Consider the multifactor model APT with three factors.Portfolio A has a beta of 0.8 on factor 1,a beta of 1.1 on factor 2,and a beta of 1.25 on factor 3.The risk premiums on the factor 1,factor 2,and factor 3 are 3%,5% and 2%,respectively.The risk-free rate of return is 3%.The expected return on portfolio A is __________if no arbitrage opportunities exist.
A)13.5%
B)13.4%
C)16.5%
D)23.0%
E)none of the above

Question

Quizplus · Accepted Answer

The expected return on portfolio A can be calculated as follows:

Expected return = Risk-free rate + (Beta1 x Risk premium 1) + (Beta2 x Risk premium 2) + (Beta3 x Risk premium 3)

Expected return = 3% + (0.8 x 3%) + (1.1 x 5%) + (1.25 x 2%)

Expected return = 3% + 2.4% + 5.5% + 2.5%

Expected return = 13.4%

Therefore, the answer is B) 13.4%.

Consider the Multifactor Model APT with Three Factors