Which of the following must be done to test the multifactor CAPM or the APT?I) Specify the risk factorsII) Identify portfolios that hedge the risk factorsIII) Test the explanatory power of hedge portfoliosIV) Test the risk premiums of hedge portfolios
A) I and II
B) II and IV
C) II and III
D) I, II, and IV
E) I, II, III, and IV

Question

Quizplus · Accepted Answer

To test the multifactor Capital Asset Pricing Model (CAPM) or the Arbitrage Pricing Theory (APT), one must specify the risk factors (I), identify portfolios that hedge those risk factors (II), test the explanatory power of these hedge portfolios (III), and finally, test the risk premiums of the hedge portfolios (IV). This comprehensive approach ensures that the models are accurately evaluated for their effectiveness in explaining asset returns.

Which of the Following Must Be Done to Test the Multifactor