A factor is a variable that:
A) affects the returns of risky assets in a systematic fashion.
B) affects the returns of risky assets in an unsystematic fashion.
C) correlates with risky asset returns in a unsystematic fashion.
D) does not correlate with the returns of risky assets in a systematic fashion.
E) None of these.

Question

Quizplus · Accepted Answer

A factor is a variable that affects the returns of risky assets in a systematic fashion, meaning that it has a consistent relationship with returns that can be modeled and predicted. Factors can include market risk, interest rate risk, inflation risk, and others. Factors that affect returns in an unsystematic (random) fashion are known as idiosyncratic risks.

A Factor Is a Variable That