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:

T-Statistic

A type of test statistic calculated to determine if a hypothesis should be accepted or rejected, commonly used in a t-test to compare means.

Degrees of Freedom

The number of independent values or quantities that can vary in the analysis without breaking any constraints, relevant in statistical tests to assess the validity of the test.

Preservatives

Substances used in food processing and preservation to prevent spoilage and decay caused by microbial growth or undesirable chemical changes.

Hours Until Spoilage

The estimated time it takes for food or other perishable items to become unsuitable for consumption due to degradation or the growth of harmful organisms.