Question #4
Reading: Reading 36 Using Multifactor Models
PDF File: Reading 36 Using Multifactor Models.pdf
Page: 2
Status: Correct
Correct Answer: B
Question
Summer Vista decides to develop a fundamental factor model. She establishes a proxy for the market portfolio, and then considers the importance of various factors in determining stock returns. She decides to use the following factors in her model: Changes in payout ratios. Credit rating changes. Companies' position in the business cycle. Management tenure and qualifications. Which of the following factors is least appropriate for Vista's factor model?
Answer Choices:
A. Management tenure and qualifications
B. Companies’ position in the business cycle
C. Changes in payout ratios
Explanation
Fundamental factors are factors measured by characteristics of the companies
themselves, like price-to-earnings (P/E) ratios or growth rates. Macroeconomic factors are
economic influences on security returns. A company's position in the business cycle is
dependent on the cycle itself, and cannot be accurately measured by looking at a
company's fundamentals – business cycle is a macroeconomic factor. Payout ratios and
management tenure are pieces of company-specific data suitable for use in a fundamental
factor model.