CFA Practice Question

There are 119 practice questions for this study session.

CFA Practice Question

Suppose we have two well-diversified portfolios (P1 and P2) that are sensitive to the same single factor. The expected return of P1, risk-free rate and P1 factor sensitivity are 0.08, 0.02, and 2, respectively. P2 factor sensitivity is 1.5. What is the expected return of P2?
A. 6%
B. 6.5%
C. 7.5%
Explanation: For P1:
0.08 = 0.02 + 2 x λ1
λ1 = 0.03
For P2, expected return = 0.02 + 1.5 x 0.03 = 6.5%

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