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CMA Final · Strategic Financial Management · Asset Pricing Theories

Under a single-factor APT model, the risk-free rate is 7% and the factor risk premium is 5% per unit of factor sensitivity. Asset Z has a factor sensitivity of 1.2. What is its equilibrium expected return?

The equilibrium expected return is 13%. APT adds the factor sensitivity times the factor premium to the risk-free rate: 1.2 multiplied by 5% gives 6%, which added to 7% yields 13%.

  1. A13%Correct
  2. B12%
  3. C6%
  4. D14.4%

Explanation

Expected return = 7% + 1.2 x 5% = 7% + 6% = 13%. The 12% option ignores the sensitivity and adds just the premium plus risk-free rate (7+5). The 6% option drops the risk-free rate.

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