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Which of the Following Statements Is False

Question 5

Multiple Choice

Which of the following statements is false?

A) We cannot observe the returns of the characteristic variables directly, so their returns in each period are estimated directly from firms' returns by regressing the return of all firms onto the value of the characteristic variables.
B) One approach is to use the estimated returns of the characteristic variables to estimate the covariance between pairs of stocks, or between a stock and the market index. The idea behind this approach is that if firms' characteristics change over time, the covariance between the characteristic returns may be more stable than the covariance between stocks themselves.
C) If you view a stock as portfolio of characteristic variables, then the stock's expected return is the sum over all the variables of the amount of each characteristic variable the stock contains times the expected return of that variable.
D) There are a number of ways that people use the estimated relation between the characteristic variables and returns. Perhaps the most straightforward approach is simply to use the relation to estimate each stock's expected return.

Correct Answer: