Question

Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist.

Answer 1

16,25%

Step-by-step explanation:

The rate of return directly indicates the percentage of the result of an investment over a specific period of time. The rate of return is one of the most important calculations to do before considering any type of investment. Through it, you can see if the return you can achieve in the medium and long term is good or bad.

In the case set out in the question above, to find the expected return from portfolio A, with a 7% rate of return, we must make the following calculation:

7%+(0,5x1%)+(1,25x7%) = 16,25%