Ch11 - APT and Multifactor models Chapter 11 Single Factor Model Returns on a security come from two sources Common macro-economic factor Firm

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APT and Multifactor models Chapter 11
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Returns on a security come from two sources Common macro-economic factor Firm specific events Possible common macro-economic factors Gross Domestic Product Growth Interest Rates Single Factor Model
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• R i = E(r i ) + Beta i (F) + e i R i = Return for security i Beta i = Factor sensitivity or factor loading or factor beta F = Surprise in macro-economic factor (F could be positive, negative or zero) e i = Firm specific events Single Factor Model Equation
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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. Multifactor Models
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R i = E(r i ) + Beta GDP (GDP) + Beta IR (IR) + e i R i = Return for security i Beta GDP = Factor sensitivity for GDP Beta IR = Factor sensitivity for Interest Rate e i = Firm specific events Multifactor Model Equation
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E(r) = r f + Β GDP
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This note was uploaded on 07/12/2011 for the course FINA 221 taught by Professor Na during the Spring '09 term at HKUST.

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Ch11 - APT and Multifactor models Chapter 11 Single Factor Model Returns on a security come from two sources Common macro-economic factor Firm

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