Question #18
Reading: Reading 36 Using Multifactor Models
PDF File: Reading 36 Using Multifactor Models.pdf
Page: 8
Status: Correct
Correct Answer: A
Question
Given a three-factor arbitrage pricing theory (APT) model, what is the expected return on the Premium Dividend Yield Fund? The factor risk premiums to factors 1, 2 and 3 are 8%, 12% and 5%, respectively. The fund has sensitivities to the factors 1, 2, and 3 of 2.0, 1.0 and 1.0, respectively. The risk-free rate is 3.0%.
Answer Choices:
A. 33.0%
B. 36.0%
C. 50.0%
Explanation
The expected return on the Premium Dividend Yield Fund is 3% + (8.0%)(2.0) + (12.0%)(1.0)
+ (5.0%)(1.0) = 36.0%.