In the time-series approach to estimating factor models, the model builder begins with the assumption that
A) nonfactor risk can be diversified away.
B) the factors that affect security returns are known.
C) the smalll-stock index consists of stocks that are below the median NYSE size.
D) the growth rate of the gross domestic product.

Question

Quizplus · Accepted Answer

The time-series approach assumes that the factors that affect security returns are known and estimates the factor loadings and risk premiums based on historical data. The other options are not directly related to the time-series approach to estimating factor models.

In the Time-Series Approach to Estimating Factor Models, the Model