Which of the following is true of the multi-factor model based on the following equation? var(r₁) = $\beta$ _i₁²var(F₁) + $\beta$ _i₁²var(F₂) + ...+ $\beta$ _ik²var(F_K) + var( $\varepsilon$ ₁)

Question

Which of the following is true of the multi-factor model based on the following equation? var(r₁)= $\beta$_i₁²var(F₁)+ $\beta$_i₁²var(F₂)+ ...+ $\beta$_ik²var(F_K)+ var($\varepsilon$₁)

Quizplus · Accepted Answer

The last term in the equation represents the firm-specific risk, while the preceding K terms represent the systematic risk attributable to each factor. Therefore, the multi-factor model breaks down the total risk of the security into systematic risk and firm-specific risk.

Which of the Following Is True of the Multi-Factor Model β\betaβ

Which of the Following Is True of the Multi-Factor Model $\beta$