There is an important difference between the characteristic variable model and the multifactor models.That difference is that

Question

Quizplus · Accepted Answer

The key difference between the characteristic variable model and multifactor models is that in the former, we estimate the return associated with each characteristic by observing the weight of each stock on each characteristic, while in the latter, we estimate the sensitivity of each stock to the different factors by observing the returns of factor portfolios. Therefore, option A is the correct choice. Options B, C, and D are incorrect because they either confuse the roles of observed and estimated variables or distort the nature of the two models.

There Is an Important Difference Between the Characteristic Variable Model