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Unformatted text preview: Investments Bodie, Kane and Marcus CHAPTER 10 CHAPTER 10 Arbitrage Pricing Arbitrage Pricing Theory and Theory and Multifactor Multifactor Models of Risk Models of Risk and Return and Return 102 Single Factor Model • Returns on a security come from two sources – Common macroeconomic factor – Firm specific events • Possible common macroeconomic factors – Gross Domestic Product Growth – Interest Rates 103 Single Factor Model Equation r i = Return for security I = Factor sensitivity or factor loading or factor beta F = Surprise in macroeconomic factor (F could be positive, negative or zero) e i = Firm specific events ( ) i i i i r E r F e β = + + i β 104 Multifactor Models • Use more than one factor in addition to market return – Examples include gross domestic product, expected inflation, interest rates etc. – Estimate a beta or factor loading for each factor using multiple regression. 105 Multifactor Model Equation r i = E(r i ) + GDP GDP + IR IR + e i r i = Return for security...
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This note was uploaded on 04/19/2011 for the course FINA 513 taught by Professor Chan during the Spring '11 term at Atlantic PR.
 Spring '11
 Chan
 Finance, Arbitrage

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