Multifactor models seek to improve the performance of the single-index model by
A) modeling the systematic component of firm returns in greater detail.
B) incorporating firm-specific components into the pricing model.
C) allowing for multiple economic factors to have differential effects.
D) All of the options are correct.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

Multifactor models aim to provide a more detailed and accurate representation of the factors affecting asset returns. They do this by incorporating multiple economic factors that can have different effects on the returns (C), modeling the systematic component of firm returns in greater detail (A), and including firm-specific components to better capture the unique aspects of each firm's performance (B).

Multifactor Models Seek to Improve the Performance of the Single-Index