Answer:
(B) 16.25%
Explanation:
Using the multifactor APT,
[tex]E(R_{A} ) = R_{f} + \beta_{1}.RP_{1} + \beta_{2}.RP_{2}[/tex]
where [tex]E(R_{A} )[/tex] = expected return on portfolio A,
[tex]R_{f}[/tex] = the risk free rate of return,
[tex]\beta_{i}[/tex] = beta on factor "i"
[tex]RP_{i}[/tex] = risk premium on factor "i".
Therefore,
return on portfolio A = 7% + (0.5 * 1%) + (1.25 * 7%)
= 0.07 + (0.5 * 0.01) + (1.25 * 0.07)
= 0.07 + 0.005 + 0.0875
= 0.1625
= 16.25%.
