Question

Which one of the following are features of potential factors in the multifactor model? I- information on these variables should be timely and accurate II- the relationship should be theoretically justifiable on economic grounds III- their impact on asset prices manifests in their unexpected movements IV- Factors should be non-diversifiable

Answer 1

Answer:

I- information on these variables should be timely and accurate

Explanation:

This is because, the ability of the variables to be timely and accurate would offer the establishment owners or investors to

1. build portfolios that replicate or modify in a desired way the characteristics of a particular index;

2. establish desired exposures to one or more risk factors, including those that express specific macro expectations (such as views on inflation or economic growth), in portfolios;

3.  perform granular risk and return attribution on actively managed portfolios;

4.  understand the comparative risk exposures of equity, fixed-income, and other asset class returns;

5.  identify active decisions relative to a benchmark and measure the sizing of those decisions; and

6.  ensure that an investor’s aggregate portfolio is meeting active risk and return objectives commensurate with active fees.