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4. Assume that both Portfolios A and B are well diversified, that expected return of A is 13.2%, and expected return of B is 6.8%.

4. Assume that both Portfolios A and B are well diversified, that expected return of A is 13.2%, and expected return of B is 6.8%. If the economy has only one factor, and beta of A is 1.4, whereas beta of B is 0.6, what are the risk-free rate (rf) and the factor risk premium (RP)?

A. rf = 2.0% and RP = 8.0%

B. rf = 3.0% and RP = 8.0%

C. rf = 3.0% and RP = 9.0%

D. Cannot determine

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