Consider the Following Multi-Index Model $R _ { \mathrm { it } } = R _ { F t } + \beta _ { i 1 } I _ { 1 t } + \beta _ { i 2 } I _ { 2 t } + \ldots + \beta _ { i j } I _ { j t } + e _ { i t }$

question 40

Essay

Consider the following multi-index model: $R _ { \mathrm { it } } = R _ { F t } + \beta _ { i 1 } I _ { 1 t } + \beta _ { i 2 } I _ { 2 t } + \ldots + \beta _ { i j } I _ { j t } + e _ { i t }$ where: $R _ { it }$ is the return on asset i in period t $R _ { F t }$ is the risk-free rate in period $$t$$ $\beta _ { i j }$ is the sensitivity of asset $i$ to factor $j$ is the value of factor $j$ in period $t$ $e _ { i t }$ is a random error term for asset $i$ in period $t$
a. Assuming the APT holds, what is the expression for the expected return of asset i?
b. How can the APT be used in decision making?
c. Outline, in list form, the assumptions underlying the APT.

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Definitions:

Primary Drives

Basic biological needs such as thirst or hunger that motivate behavior to satisfy those needs.

Physiologically Based

Pertains to the underlying physiological or biological mechanisms of an organism or process.

Anorexia Nervosa

A psychological and potentially life-threatening eating disorder characterized by self-starvation and excessive weight loss.

Bulimia

An eating disorder marked by periods of binge-eating followed by behaviors to prevent weight gain, such as self-induced vomiting or excessive exercise.