Tests of multifactor models indicate
A) the single-factor model has better explanatory power in estimating security returns.
B) macroeconomic variables have no explanatory power in estimating security returns.
C) it may be possible to hedge some economic factors that affect future-consumption risk with appropriate portfolios.
D) multifactor models do not work.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

Multifactor models, which include various economic factors, can help in understanding the risks associated with future consumption. By identifying and understanding these factors, investors can create portfolios that hedge against these risks, thereby potentially improving the risk-return profile of their investments.

Tests of Multifactor Models Indicate