Exam 11: Factor Models

In an efficient portfolio, increased diversification results in an averaging of

The covariance between Security D and Security E is 90. In a one-factor model, the sensitivity for D is 4; the sensitivity for E is 1.5. The variance for the factor is

Two-factor models use __ - regression analysis which refers to the fact that there is more than one variable on the right-hand sign of the equation.

Factor models are a return-generating process that attributes the return on a security to the security's sensitivity to the movements of various ____ factors.

A process in which a security's return is assumed to be related to a market return is

Assume a one factor model for a security's return is 10% - 1.5 (CPI). For the year, the CPI's growth rate was 5%, and security's actual return was 8%. The security's unique return was

The two-factor model for Security X is 3% + l.5(GDP) - 2(CPI) and for Security Y is 4% + 2(GDP) - .8(CPI). An analyst forecasts GDP at 4% and CPI at 5% with respective variances of 8% and 3%. Covariance (GDP, CPI) is .6. The covariance between Securities X and Y is

For a one-factor model, an analyst finds the variance of the factor is 4, the slope for the security is 2, and the variance of the random error is 12. The variance for the security is

Diversification leads to an averaging of ___ risk in a one-factor model.

An analyst has a two-factor model to forecast the return for Security B: -2% + 4%(GDP) + 2.5%(IP). You forecast GDP at 3% and IP at 2% with variances of 4% and 6% respectively. The covariance (GDP, IP) is .4, and the variance of Security B is 125. The variance of the random error term is

If a two-factor model used the growth rate of the gross domestic product and the level of oil prices as factors, what would the intercept term of the model represent?

For a one-factor model, an analyst finds the variance of the factor is 6 and the variance of the random error is 10. If the total variance for the security is 106, its sensitivity to the factor is

To develop the set of efficient portfolios, the one-factor model does not require the estimation of direct covariances between each security. Instead, it requires the estimate of the

Time series multiple-factor models

In the time-series approach to estimating factor models, the model builder begins with the assumption that

Factor models are a return-generating process that attributes the return on a security to the security's sensitivity to the movements of various ____ factors.

The variance of a security's return will be reduced if in a two-factor model

Sector-factor model is a special kind of a _________ - factor model in which some of the factors are particular industries or economic sectors.

The one-factor model's sensitivity term relates to the market model's

A cross-sectional forecasting model