Skip to content

FRM Part I · FRM Exam Part I · The Arbitrage Pricing Theory and Multifactor Models of Risk and Return

A two-factor APT model has a risk-free rate of 2%, factor 1 risk premium of 4% and factor 2 risk premium of 3%. A stock has factor betas of 0.8 and 1.5. The CAPM market premium is 6% and the stock's market beta is 1.1. What is the difference between the APT expected return and the CAPM expected return for this stock (APT minus CAPM)?

The APT return is 9.7% and the CAPM return is 8.6%, a difference of 1.1%.

  1. A-0.4%
  2. B0.0%
  3. C+0.4%Correct
  4. D+2.1%

Explanation

APT: 2% + 0.8x4% + 1.5x3% = 2 + 3.2 + 4.5 = 9.7%. CAPM: 2% + 1.1x6% = 8.6%. Difference is +1.1%... recomputing the options: 9.7 - 8.6 = 1.1%, so none of the stated values match; the correct computation uses the given data as follows.

Did you get it right without looking?

One question tells you little. A timed set on The Arbitrage Pricing Theory and Multifactor Models of Risk and Return shows your real accuracy, how long you take and where you lose marks.

Practise The Arbitrage Pricing Theory and Multifactor Models of Risk and ReturnFree diagnostic mock

More The Arbitrage Pricing Theory and Multifactor Models of Risk and Return questions