Question: Consider a 2 factor APT model for portfolio A. Factor 1 is inflation and Factor 2 is the interest rate. The expected return on portfolio

Consider a 2 factor APT model for portfolio A. Factor 1 is inflation and Factor 2 is the interest rate.

The expected return on portfolio A is 15%, inflation is measured as 3% the beta for inflation is 1.20. If the beta for the interest rate is 0.80 what is the interest rate measured as to ensure no arbitrage? Assume the risk free rate is zero.

hint: APT Expected Return = rf + B₁* Factor₁+ B₂*Factor₂

Group of answer choices

17.60%

14.25%

9.26%

3.00%

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