In a factor model, the variable "B" measures the
A) sensitivity to the factor.
B) riskfree rate.
C) unique return of the security.
D) random error

Question

Quizplus · Accepted Answer

In a factor model, the variable "B" measures the sensitivity to the factor. It represents the degree to which the security's returns are influenced by the underlying factor. Therefore, option A is the correct choice. Option B is incorrect because the risk-free rate is not a factor in the model. Option C is incorrect because the unique return of the security is denoted by the variable "u" in a factor model. Option D is incorrect because random error is represented by the variable "e" in a factor model.

In a Factor Model, the Variable "B" Measures the