The assumption that the returns on all securities respond to a single ___ greatly simplifies the task of identifying the tangency portfolio.
A) common macroeconomic variable
B) common return
C) factor loading
D) common factor

Question

Quizplus · Accepted Answer

The assumption that the returns on all securities respond to a single common factor greatly simplifies the task of identifying the tangency portfolio. This is because it allows for the use of techniques such as factor analysis and principal component analysis to identify the underlying factor that affects the returns of all securities. Once this factor has been identified, it is possible to construct a portfolio that maximizes the expected return for a given level of risk by investing in the securities that have the highest exposure to this factor. This portfolio is known as the tangency portfolio.

The Assumption That the Returns on All Securities Respond to a Single