A factor is a variable that:
A)affects the returns of risky assets in a systematic fashion.
B)affects the returns of risky assets in an unsystematic fashion.
C)correlates with risky asset returns in a unsystematic fashion.
D)does not correlate with the returns of risky assets in a systematic fashion.
E)None of the above.

Question

Quizplus · Accepted Answer

A factor is a variable that affects the returns of risky assets in a systematic fashion. Systematic factors refer to those that cannot be diversified away, such as macroeconomic factors or industry-specific factors, while unsystematic factors can be diversified away, such as company-specific factors. Therefore, choice A is the correct answer.

A Factor Is a Variable That