In a factor model any portion of a security's return unexplained by the model is assumed to be _______ with unique elements of returns on other securities.
A) directly correlated
B) indirectly correlated
C) uncorrelated
D) somewhat correlated

Question

Quizplus · Accepted Answer

In a factor model, any portion of a security's return unexplained by the model is assumed to be uncorrelated with unique elements of returns on other securities. This is because the model seeks to explain the common factors that affect the returns of multiple securities, so any unexplained portion is assumed to be idiosyncratic to that specific security and not related to the factors being examined.

In a Factor Model Any Portion of a Security's Return