medium · FRM Part 1 Foundations of Risk Management
In a multifactor model, what does the 'Factor Risk Premium' (λ_j) represent?
- The total realized return of the factor over a specific historical sample period.
- The standard deviation of the factor's historical return series, used as a measure of volatility.
- The correlation coefficient between the factor's return series and the broad market portfolio's return.
- The expected excess return of a portfolio with a beta of 1.0 on factor j and 0.0 on all others.
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