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.

a.13.5%
b.16.25%
c.23%
d.15%

(B) 16.25%

Explanation:

Using the multifactor APT,

where = expected return on portfolio A,

= the risk free rate of return,

= beta on factor "i"

=  risk premium on factor "i".

Therefore,

return on portfolio A = 7% + (0.5 * 1%) + (1.25 * 7%)

= 0.07 + (0.5 * 0.01) + (1.25 * 0.07)

= 0.07 + 0.005 + 0.0875

= 0.1625

= 16.25%.

answer; complain or request hazard correction from your employer;

a. money supply  

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