Question: Consider a two-factor model under the arbitrage pricing theory setting. If a well-diversified portfolio P has betas of .5 and 1.3 on the two factors,

Consider a two-factor model under the arbitrage pricing theory setting. If a well-diversified portfolio P has betas of .5 and 1.3 on the two factors, respectively and the risk premiums on the two factor portfolios are 3% and 6%, respectively. The risk-free rate of return is 4%. Under the assumption of no arbitrage, what is the expected return of portfolio P?

		10.3%
		6.3%
		5.3%
		5%

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