Question #1
Reading: Reading 36 Using Multifactor Models
PDF File: Reading 36 Using Multifactor Models.pdf
Page: 1
Status: Unattempted
Correct Answer: B
Question
A multi-factor model that uses unexpected changes (surprises) in macroeconomic variables (e.g., inflation and gross domestic product) as the factors to explain asset returns is called a:
Answer Choices:
A. statistical factor model
B. macroeconomic factor model
C. fundamental factor model
Explanation
Macroeconomic factor models use unexpected changes (surprises) in macroeconomic
variables as the factors to explain asset returns. One example of a factor in this type of
model is the unexpected change in gross domestic product (GDP) growth. In fundamental
factor models, the factors are characteristics of the stock or the company that have been
shown to affect asset returns, such as book-to-market or price-to-earnings ratios. A
statistical factor model identifies the portfolios that best explain the historical cross-
sectional returns or covariances among assets. The returns on these portfolios represent
the factors.