Multiple-factor models assume that several factors are necessary to model the return-generating process because
A) the economy is not a simple, monolithic entity
B) the process is random and requires more explanatory variables
C) more factors increase the diversification effects on the expected returns
D) the size of the standard error is reduced

Question

Quizplus · Accepted Answer

Multiple-factor models recognize that the economy is not a simple, monolithic entity and that many factors impact asset returns. Therefore, several factors are necessary to model the return-generating process accurately.

Multiple-Factor Models Assume That Several Factors Are Necessary to Model