Chapter 6: Models of asset returns Flashcards
1
Q
Macroeconomic Multifactor model
A
A multifactor model where:
The factors are the main macroeconomic variables such as interest rates, inflation, economic growth and exchange rates.
2
Q
Fundamental Multifactor model
A
A multifactor model where
The factors will be company specifics such as P/E ratios, liquidity ratios and gearing measurements.
3
Q
Statistical Mutlifactor model
A
A multifactor model where:
The factors are not specific items initially.
The mehtod uses principal component analysis and historical returns on stocks to decide upon the factors.
4
Q
Single-index model
A
This has just a single factor, which is usually the return on the market.
5
Q
Fundamental Factors
A
- Level of gearing
- Price earnings ratio
- level of research and development spending
- industry group to which the company belongs.
6
Q
Specific risk
A
Risk that CAN be diversified away
7
Q
Systematic risk
A
Risk that CANNOT be diversified away
