4. The following table shows the factor sensitivities and expected returns of three well-
diversified portfolios each sensitive to the same factor:
Portfolio Factor Sensitivity Expected Return
A 0.5 6.5%
B -0.6 3.2%
C 0.7 7.1%
Assuming a single factor explains returns and no arbitrage opportunity exists, a risk-free rate
of 5%, the factor risk premium of is closest to:
A. 3.0%.
B. 5.1%.
C. 11.4%.
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