Tests of multifactor models indicate
A)the single-factor model has better explanatory power in estimating security returns.
B)macroeconomic variables have no explanatory power in estimating security returns.
C)it may be possible to hedge some economic factors that affect future consumption risk with appropriate portfolios.
D)multifactor models do not work.
E)none of the above is true.

Question

Quizplus · Accepted Answer

Tests of multifactor models suggest that it may be possible to hedge certain economic factors that affect future consumption risk with appropriate portfolios. Option A is incorrect as multifactor models have been found to have better explanatory power than the single-factor model. Option B is incorrect as macroeconomic variables have been found to have some explanatory power in estimating security returns. Option D is incorrect as multifactor models have been found to work.

Tests of Multifactor Models Indicate