Amy wants to invest in a portfolio and has collected the following information about sensitivity of two stocks. As you are financial management consultant, she approached you and presented this information below. 

Stock Beta 1 Beta 2 

A 1.4 0.75 

B -0.90 1.75     

Required: a) Assuming the expected risk premium is 7% on factor 1 and 8% on factor 2, Using APT calculate risk premium of each of the stock for Amy. b) Suppose she buys £1000 of stock A and sell £400 of stock B. Calculate the sensitivity of her portfolio to each of the factors and calculate expected risk premium of the portfolio.

Answer rating: 100% (QA)

To calculate the risk premium of each stock using the Arbitrage Pricing Theory APT we need to multiply the beta of each stock by the corresponding ris... View the full answer