 # CFAI 2015 PM Error?

The “Alpha” case… Question 1 uses a macroeconomic factor model and asks for the expected return on the energy sector. From the text, and even from the solution, expected return in this kind of factor model is equal to the intercept, because the expected return occurs when there are no surprises. So, I chose the my answer based on this logic (got the question wrong). However, the question stem gives you information for economic surprises (I figured they were looking to see if we know how to interpret the intercept). The answer just calculates the return (based on the surprises plus the expected return), but very clearly shows the intercept (my answer) as the expected return on asset/sector i.

To me, the question is sloppy. Sure, it’s one extra word (expected return vs. return), but by definition, the expected return in this model uses no surprises.

Did anyone else notice this? Thoughts?

Yeah, noticed that too. I reckon we have to use the intercepts if they only gave the model in its equation form. If they give values for the surprises, then we have to calculate using them. But I’ll be glad, if someone could throw a bit more light on this.

I sent them an email about it. I think it is just a sloppy question. If they just ask for the “return” or “calculated return” I wouldn’t have any issue with the question (or if they didn’t have both answers present…). We were given sufficient information to calculate the intercept, too, which is what they do in their answer before adding the surprises. The question uses a very particular word, which is the only reason I went with the answer not using the surprises. I will follow up if I get any reply from them.

How about the fact that the question explicitly states “From Exhibit 1” only and then goes on to use data from Exhibit 2 in the solution? This question was awful. I sat there so confused because I knew the intercept was expected return in this model but I’m staring at that stupid risk-free rate because I’m thinking we can’t use Exhibit 2 and incorrectly second guessing myself.