Consider the multifactor APT.The risk premiums on the factor 1 and factor 2 portfolios are 6% and 4%,respectively.The risk-free rate of return is 4%.Stock A has an expected return of 16% and a beta on factor 1 of 1.3.Stock A has a beta on factor 2 of ________.
A)1.33
B)1.05
C)1.67
D)2.00
E)none of the above

Question

Quizplus · Accepted Answer

Using the APT, we can find the expected return on Stock A as:

Expected return on Stock A = risk-free rate + (beta 1 * risk premium 1) + (beta 2 * risk premium 2)
16% = 4% + (1.3 * 6%) + (beta 2 * 4%)
Solving for beta 2, we get:
Beta 2 = (16% - 4% - (1.3 * 6%)) / 4%
Beta 2 = 1.05
Therefore, the beta of Stock A on factor 2 is 1.05.

Consider the Multifactor APT