Suppose that you use Arbitrage Pricing Theory (APT) to evaluate well-diversified portfolios. The three factor...
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Suppose that you use Arbitrage Pricing Theory (APT) to evaluate well-diversified portfolios. The three factor portfolios used in an APT model, portfolios 1, 2, and 3, have expected returns E(r1) = 4%, E(r2) = 3%, and E(r3) = 7%. Suppose further that the risk-free rate (0) is 2%. Calculate the total return on a well- diversified portfolio with its beta on the first factor, A1 = 1.1, beta on the second factor, A2 = .9, and beta on the third factor, A3 = 1.3.
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