Let R, be the return on security i, given the following three-factor model: R₁ = a₁ + B₁,111 + B1,212 + B1,313 + C₁ Where a, is the specific return of security i. C is the independent random normal variables. 11, 12, 13 are changes in the three factors. Pi,1, B1,2, B1,3 are sensitivity of security i. (i) Describe three categories of model that can be used to choose factors 1₁, 12, 13. (ii) Provide examples of the variables that can be used for the factors 1₁, 12, 13 for two of these three categories of model.
Let R, be the return on security i, given the following three-factor model: R₁ = a₁ + B₁,111 + B1,212 + B1,313 + C₁ Where a, is the specific return of security i. C is the independent random normal variables. 11, 12, 13 are changes in the three factors. Pi,1, B1,2, B1,3 are sensitivity of security i. (i) Describe three categories of model that can be used to choose factors 1₁, 12, 13. (ii) Provide examples of the variables that can be used for the factors 1₁, 12, 13 for two of these three categories of model.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Let R; be the return on security i, given the following three-factor model:
Ri = a; + Bi1l1 + Bi2l2 + Bi3l3 + Ci
Where a, is the specific return of security i.
C; is the independent random normal variables.
11, 12, 13 are changes in the three factors.
Bi,1, Bi,2, Bi,3 are sensitivity of security i.
(i)
Describe three categories of model that can be used to choose factors I, 12,13.
(ii)
Provide examples of the variables that can be used for the factors I, 12, 13 for
two of these three categories of model.
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