Consider the following list of risk factors: 1. monthly growth in industrial production
2. return on high book to market value portfolio minus return on low book to market value portfolio
3. change in inflation
4. excess return on stock market portfolio
5. return on small cap portfolio minus return on big cap portfolio
6. unanticipated change in bond credit spread
Which of the following factors would you use to develop a macroeconomic-based risk factor model?
A) 1, 2, and 3.
B) 1, 3, and 5.
C) 2, 4, and 5.
D) 1, 3, and 6.
E) 4, 5, and 6.

Question

Quizplus · Accepted Answer

To develop a macroeconomic-based risk factor model, factors that are directly influenced by or reflective of macroeconomic conditions are chosen. These include 1) monthly growth in industrial production, which is a direct measure of economic activity; 3) change in inflation, which is a fundamental macroeconomic indicator; and 6) unanticipated change in bond credit spread, which can reflect changes in the economic outlook or risk perception in the economy.

Consider the Following List of Risk Factors: 1