2. Multifactor Models

2. Multifactor Models - 1 Multifactor Models 1. General...

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1 Multifactor Models 1. General Multifactor Model E(r i ) - r RF = α i + b i1 F 1 + b i2 F 2 + b i3 F 3 + ……… + b in F n + e i E(r i ) = α i + r RF + b i1 F 1 + b i2 F 2 + b i3 F 3 + ……… + b in F n + e i E(r i ) = expected return or realized return • F j = systematic risk factor that influences the returns on all assets • b j = sensitivity of the asset to movements in F j • b j = risk parameter related to F j factor sensitivity, factor loading, factor beta • b ij F j = risk premium of factor j for some stocks or portfolios, a “b” can equal zero • e i = part of return (and unexpected events) specific to this firm e i is completely diversifiable in a large portfolio same variance and covariance assumptions as in the SI Model regarding the error terms σ 2 e > 0, where σ 2 e is the firm-specific variance (risk) α i = E(r i ) - r RF if there are no systematic risks
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2 2. APT Multifactor Model r i = r RF + α i + b i1 F 1 + b i2 F 2 + b i3 F 3 + ……… + b in F n Now, introduce the concept of a
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This note was uploaded on 09/27/2009 for the course UGBA 133 taught by Professor Distad during the Summer '08 term at Berkeley.

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2. Multifactor Models - 1 Multifactor Models 1. General...

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