BECAUSE THE SINGLE FACTOR EXPLAINS RETURNS, E(RP) = RF + 0

4. - CFA 2018 LEVEL 2 PORTFORLIO QUESTION BANK R48 INTRODUCTION TO MULTIFACTOR MODELS Q BANK
CFA 2018 LEVEL 2 PORTFORLIO QUESTION BANK R48 INTRODUCTION TO MULTIFACTOR MODELS Q BANK

4. A is correct. Because the single factor explains returns, E(R

p

) = R

F

+ 0.5 x factor risk

premium (λ) given E(R

A

) = 0.065 = 0.05 + 0.5(λ). λ = (0.065 - 0.05)/0.5 = 0.03 = 3%.