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.

Question

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.

Quizplus · Accepted Answer

The Answer of 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.

Consider the Following Multi-Index Model Rit=RFt+βi1I1t+βi2I2t+…+βijIjt+eitR _ { \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 }Rit​=RFt​+βi1​I1t​+βi2​I2t​+…+βij​Ijt​+eit​

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