Arbitrage Pricing Theory Assume the assumptions of Arbitrage Pricing Theory hold and the realized returns are described by a two factor model (with factors denoted by F1, F2). All other risk is diversifiable. Without loss, assume that E F1 = E F2 = 0 Here are three assets taken from the economy: A,B,C. Their multifactor representation is:

rA = 0.15 + F1 + A

rB = 0.1 + F1 F2 + B

rC = 0.25 0.5 F1 + F2 + C

What is the risk free rate that is consistent with No Arbitrage