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Old 11-15-2010, 09:46 AM
Turloughmack Turloughmack is offline
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Join Date: Nov 2010
Location: Donegla + Ireland
Posts: 2
Default Arbitrag Pricing Model

I have a question about Arbitrage Pricing Theory that I cannot solve or understand.

The formula I am using is

R(i) = (1 - b1 - b2)R(f) + b1(F1) + b2(F2)

The question I am asked says:

Explain how to make a risk-free return of 3.5% if R(i) = 4%.

I am confused by the wording of the question. I also have figures for the b1,b2,F1,F2 from the previous part of the question but I don't know if they are needed here. I will supply them anyway.

b1 = b2 = 1/4, R(f) = 1%, F1 = 2%, F3 = 3%
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