The Table Below Provides Factor Risk Sensitivities and Factor Risk

question 52

Multiple Choice

The table below provides factor risk sensitivities and factor risk premia for a three factor model for a particular asset where factor 1 is MP the growth rate in U.S. industrial production, factor 2 is UI the difference between actual and expected inflation, and factor 3 is UPR the unanticipated change in bond credit spread. $$\begin{array} { l c c } \text { Risk Factor } & \text { Factor Sensitivity } ( \boldsymbol { \beta } ) & \text { Risk } \text { Premium( } \boldsymbol { \lambda } ) \\\hline \text { MP } & 1.76 & 0.0259 \\\text { UI } & - 0.8 & - 0.0432 \\\text { UPR } & 0.87 & 0.0149\end{array}$$ Calculate the expected excess return for the asset.

• A)12.32%
• B)9.32%
• C)4.56%
• D)6.32%
• E)8.02%

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Definitions:

Res Ipsa Loquitur

A legal doctrine that infers negligence from the very nature of an accident or injury, in the absence of direct evidence on how any defendant behaved.

Rebuttable Presumption

is a presumption in law that one can challenge and overturn with evidence to the contrary.

Breach of Duty

Failure to meet the standard of care or obligation required by law or contract, which could lead to legal action.

Pure Comparative Negligence

A legal doctrine under which damages in an accident are calculated based on the degree of fault of each party, allowing a plaintiff to recover even if they are 99% at fault, but the recovery is reduced by the plaintiff's level of fault.