In a factor model, the return on a stock in a particular period will be related to
A) factor risk.
B) nonfactor risk.
C) standard deviation of returns.
D) factor risk and nonfactor risk.
E) None of the options are true.

Question

Quizplus · Accepted Answer

In a factor model, the return on a stock is typically related to both factor risk (systematic risk that affects many or all securities) and nonfactor risk (unsystematic risk that is specific to a single asset or a small group of assets). Factor models aim to explain stock returns with these risks.

In a Factor Model, the Return on a Stock in a Particular