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.
$\begin{array}{lcc}
\text { Risk Factor } & \text { Factor Sensitivity }(\beta) & \text { Risk Premium( } \lambda) \
\hline \text { MP } & 1.76 & 0.0259 \
\text { UI } & -0.8 & -0.0432 \
\text { UPR } & 0.87 & 0.0 140
\end{array}$

Calculate the expected excess return for the asset.
A) 12.32%
B) 9.32%
C) 4.56%
D) 6.32%
E) 8.02%

Question

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.
$\begin{array}{lcc}
\text { Risk Factor } & \text { Factor Sensitivity }(\beta) & \text { Risk Premium( } \lambda) \
\hline \text { MP } & 1.76 & 0.0259 \
\text { UI } & -0.8 & -0.0432 \
\text { UPR } & 0.87 & 0.0 140
\end{array}$

Calculate the expected excess return for the asset.
A) 12.32%
B) 9.32%
C) 4.56%
D) 6.32%
E) 8.02%

Quizplus · Accepted Answer

The table below shows the relevant calculations
 $\begin{array}{lccc}
\text { Risk Factor } & \text { Factor Sensitivity }(\beta) & \text { Risk Premium }(\lambda) & (\beta) \times(\lambda) \
\hline \text { MP } & 1.76 & 0.0259 & 0.0456 \
\text { UI } & -0.8 & -0.0432 & 0.0346 \
\text { UPR } & 0.87 & 0.0149 & 0.013 \
\text { Expected return } & & & 0.1232
\end{array}$

The Table Below Provides Factor Risk Sensitivities and Factor Risk