Models of Asset Returns

Question 1

Types of Multifactor Models

Answer 1

• Macroeconomic - The factors are the main macroeconomic variables such as interest rates, inflation, economic growth and exchange rates
• Fundamental - The factors will be company specifics such as P/E ratios, liquidity ratios and gearing measurements
• Statistical - The factors are not specific items initially. The method uses principal components analysis and historical returns on stocks to decide upon the factors