Question #37
Reading: Reading 36 Using Multifactor Models
PDF File: Reading 36 Using Multifactor Models.pdf
Page: 17
Status: Correct
Correct Answer: A
Question
Given a three-factor arbitrage pricing theory APT model, what is the expected return on the Freedom Fund? The factor risk premiums to factors 1, 2, and 3 are 10%, 7% and 6%, respectively. The Freedom Fund has sensitivities to the factors 1, 2, and 3 of 1.0, 2.0 and 0.0, respectively. The risk-free rate is 6.0%.
Answer Choices:
A. 33.0%
B. 30.0%
C. 24.0%
Explanation
The expected return on the Freedom Fund is 6% + (10.0%)(1.0) + (7.0%)(2.0) + (6.0%)(0.0) =
30.0%.