- CFA Exams
- CFA Level I Exam
- Study Session 16. Portfolio Management (1)
- Reading 44. Using Multifactor Models
- Subject 2. Factors and types of multifactor models

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**CFA Practice Question**

Portfolio A has an expected return of 9.85% and a factor sensitivity of 0.5. Portfolio B has an expected return of 16.7% and a factor sensitivity of 1. The risk-free rate is 3%, and there is one factor. The factor's price of risk is ______.

A. 11.2%

B. 12.6%

C. 13.7%

**Explanation:**E(R

_{A}) = 3 + 0.5 λ = 9.85

E(R

_{B}) = 3 + 1 λ = 16.7

Using either equation, we can calculate the price of factor risk as λ = (9.85 - 3)/0.5 = (16.7-3)/1 = 13.7

The risk premium for each unit of factor risk, or price of risk, is 13.7%.

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**User Contributed Comments**
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b25331 |
If you are low on time (and fuel), do them all..... C |