There Is an Important Difference Between the Characteristic Variable Model

question 71

Multiple Choice

There is an important difference between the characteristic variable model and the multifactor models.That difference is that

• A) in the multifactor models, the returns of the factor portfolios are observed, and we estimate the sensitivity of each stock to the different factors. In the characteristic variable model, the weight of each stock on each characteristic is observed, and then we estimate the return associated with each characteristic.
• B) in the multifactor models, the returns of the factor portfolios are observed, and we estimate the return associated with each characteristic. In the characteristic variable model, the weight of each stock on each characteristic is observed, and then we estimate the sensitivity of each stock to the different factors.
• C) in the characteristic variable model, the returns of the factor portfolios are observed, and we estimate the the return associated with each characteristic. In the multifactor models, the weight of each stock on each characteristic is observed, and then we estimate the sensitivity of each stock to the different factors.
• D) in the multifactor models, the returns of the factor portfolios are not observed, and we estimate the sensitivity of each stock to the different factors. In the characteristic variable model, the weight of each stock on each characteristic is not observed, and then we estimate the return associated with each characteristic.

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Definitions:

Wine Barrels

Containers traditionally made of oak wood, used for aging and storing wine to enhance its flavor and quality.

Exhaustible Resource

A natural resource that has a finite supply and can be depleted by human activities, such as fossil fuels or minerals.

User Cost

The opportunity cost of using a durable good, which includes depreciation and the foregone interest on the funds tied up in owning the good.

Market Rate

The prevailing price or interest rate for goods, services, or securities in a competitive marketplace.