Consider the multifactor APT. There are two independent economic factors, F₁ and F₂. The risk-free rate of return is 6%. The following information is available about two well-diversified portfolios: $$\begin{array} { c c c c } \text { Portfolio } & \beta \text { on } \mathrm { F } _ { 1 } & \beta \text { on } \mathrm { F } _ { 2 } & \begin{array} { c } \text { Expected } \ \text { Return } \end{array} \ \text { A } & 1.0 & 2.0 & 19 \% \ \text { B } & 2.0 & 0.0 & 12 \% \ \hline \end{array}$$ Assuming no arbitrage opportunities exist, the risk premium on the factor F₁ portfolio should be A) 3%. B) 4%. C) 5%. D) 6%.

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Quizplus · Accepted Answer

The risk premium on the factor F₁ portfolio is 4%. This can be calculated using the following formula:Risk premium = Expected return - Risk-free rateFor portfolio A, the expected return is 19% and the risk-free rate is 6%. Therefore, the risk premium is 19% - 6% = 13%.For portfolio B, the expected return is 12% and the risk-free rate is 6%. Therefore, the risk premium is 12% - 6% = 6%.Since portfolio A has a higher beta on F₁ than portfolio B, it should have a higher risk premium. Therefore, the risk premium on the factor F₁ portfolio is 13%.

Consider the Multifactor APT Assuming No Arbitrage Opportunities Exist, the Risk Premium on the F1

Consider the Multifactor APT Assuming No Arbitrage Opportunities Exist, the Risk Premium on the F₁