Question
#4. Suppose all stocks obey an APT two-factor model. The risk free interest rate is 1%. Stock A has a beta of 1 with respect
#4. Suppose all stocks obey an APT two-factor model. The risk free interest rate is 1%. Stock A has a beta of 1 with respect to factor 1 and a beta of 2 with respect to factor 2. Stock B has a beta of 2 with respect to factor 1 and a beta of 1 with respect to factor 2. The risk-premium on factor 1 is 4% and the risk-premium on factor 2 is 6%. An investor has a portfolio with $2,500 invested in stock A and $7,500 invested in stock B.
(a) What are the betas on each of the two risk factors for the investor's portfolio?
(b) What is the expected return on the investor's portfolio?
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