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CMA Final · Strategic Financial Management · Asset Pricing Theories

Under a single-factor APT, the risk-free rate is 8%, and the factor risk premium is 5% for each unit of sensitivity to the industrial-production factor. A stock has a sensitivity of 1.6 to this factor. What is its APT expected return?

The expected return is 16%. In a single-factor APT the return equals the risk-free rate plus the factor sensitivity times the factor premium. That is 8% plus 1.6 times 5%, which is 8% plus 8%, giving 16%.

  1. A8.0%
  2. B13.0%
  3. C16.0%Correct
  4. D21.0%

Explanation

Expected return = 8% + 1.6 x 5% = 8% + 8% = 16%. Option 13% adds only 5% to Rf, ignoring the sensitivity. Option 21% multiplies 1.6 by 13%, wrongly treating the total as the premium.

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