Multifactor models, such as the one constructed by Chen, Roll, and Ross, can better describe assets' returns by
A) expanding beyond one factor to represent sources of systematic risk.
B) using variables that are easier to forecast ex ante.
C) calculating beta coefficients by an alternative method.
D) using only stocks with relatively stable returns.
E) ignoring firm-specific risk.

Question

Quizplus · Accepted Answer

Multifactor models, including the one by Chen, Roll, and Ross, improve the description of asset returns by incorporating multiple factors to represent different sources of systematic risk, beyond the single factor (market risk) used in models like the CAPM. This allows for a more comprehensive understanding of what drives asset returns.

Multifactor Models, Such as the One Constructed by Chen, Roll