Question #28 - Reading 36 Using Multifactor Models

Reading: Reading 36 Using Multifactor Models

PDF File: Reading 36 Using Multifactor Models.pdf

Page: 13

Status: Incorrect

Correct Answer: A

Your Answer: B

Shared Context

- Pierre's answer to Belair's first request regarding the equally weighted portfolio, is closest to: A) 1.75%. B) 2.13%. C) 2.63%.

Question

The actual return of Merci is closest to:

Answer Choices:

A. 9%

B. 10%

C. 11%.

Explanation

Key things to remember are to start with the APT required / expected return, then use surprises rather than actual values for each factor (i.e., actual minus expected), and finally to also add/subtract the company-specific surprise. actual return = 10 – 0.3 × (3.5 – 2.5) – 0.7 × (6.5 – 5.5) + 2 = 11%

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