Can anyone clarify the errata for SchweserNotes Book 5 Page 186 (see quote below)? When is the intercept term equal the risk-free rate and what’s it gotta do with standardized sensitivities? Are there fundamental factor models with coefficients that are not standardized? I can’t find the corresponding materials on the CFAI text either. It should be somewhere on pages 421-440 according to the index… "Last line of 2nd paragraph Intercept term(aI): With coefficients that are not standardized, the intercept term in a fundamental factor model is interpreted as the risk-free rate. With standardized coefficients, the intercept term has no interpretation beyond being the intercept of the regression. 4th bullet point Intercept term, 2nd sentence: In contrast, the intercept of a fundamental factor model with standardized sensitivities has no economic interpretation, it is simply the regression intercept necessary to make the asset specific risk of the asset equal to zero. "
Is this an actual errata listed? I thought there was just a difference between statistical and fundamental factor models.
In order to standardize a coefficient, check page 431. Typically, a fundamental factor model would not be standardized and the intercept could be interpreted as the rf rate. APT Model Intercept = risk free rate Fundamental Factor Model Intercept = risk free rate Macroeconomic Model Intercept = expected return on asset given no surprises in macroeconomic variables.
bpdulog Wrote: ------------------------------------------------------- > In order to standardize a coefficient, check page > 431. Typically, a fundamental factor model would > not be standardized and the intercept could be > interpreted as the rf rate. > > > APT Model Intercept = risk free rate > > Fundamental Factor Model Intercept = risk free > rate > > Macroeconomic Model Intercept = expected return on > asset given no surprises in macroeconomic > variables. Hmm… I was under the impression fundamental factor models were standardized and ai was nothing more than an intercept. So if they are not standardized, it can be interpreted as the risk-free rate?
thanks
dhwit Wrote: ------------------------------------------------------- > bpdulog Wrote: > -------------------------------------------------- > ----- > > In order to standardize a coefficient, check > page > > 431. Typically, a fundamental factor model > would > > not be standardized and the intercept could be > > interpreted as the rf rate. > > > > > > APT Model Intercept = risk free rate > > > > Fundamental Factor Model Intercept = risk free > > rate > > > > Macroeconomic Model Intercept = expected return > on > > asset given no surprises in macroeconomic > > variables. > > Hmm… I was under the impression fundamental > factor models were standardized and ai was nothing > more than an intercept. > > So if they are not standardized, it can be > interpreted as the risk-free rate? +1. The Marcoeconomic model has a meaningful intercept, that is the Expected return of the stock, the fundamental is meaningless. Just a regression (b0) intercept.
The fundamental model intercept is meaningless!
I will refer you all to Stalla guide page 18-40 which states: “…the intercept of a fundamental model can be interpreted as the risk-free rate (unless the factor sensitivities are standardized, which are discussed below)…”
bpdulog Wrote: ------------------------------------------------------- > I will refer you all to Stalla guide page 18-40 > which states: > > “…the intercept of a fundamental model can be > interpreted as the risk-free rate (unless the > factor sensitivities are standardized, which are > discussed below)…” Fair enough… CFA mock had a question on this topic. They specifically indicated standardized fundamental models… ai = intercept only … no mention of a non-standard model Thing about the CFA mock is, they never expand further than a one direct statement about the correct answer… sucks
Macroeconomic intercept is expected return as computed from the APT Model
Schweser book 5, p186: “The fundamental factor model intercept equals the expected return for stocks with factor sensitivities equal to the market wide averages”.
scarfie1 Wrote: ------------------------------------------------------- > Schweser book 5, p186: “The fundamental factor > model intercept equals the expected return for > stocks with factor sensitivities equal to the > market wide averages”. CFAI, page 431: “In fundamental factor models, the factors are stated as returns rather than return surprises in relation to predicted values, so the do not generally have expected values of zero. This approach changes the interpretation of the intercept, which we no longer interpret as the expected return.”
LOL Scarfie, Tell me you did not just quote the error the original poster was asking a question about. Ps. i’m pretty sure you did, you should look at the errata
Page: 186 - Correction Last line of 2nd paragraph Intercept term(aI): With coefficients that are not standardized, the intercept term in a fundamental factor model is interpreted as the risk-free rate. With standardized coefficients, the intercept term has no interpretation beyond being the intercept of the regression. 4th bullet point Intercept term, 2nd sentence: In contrast, the intercept of a fundamental factor model with standardized sensitivities has no economic interpretation, it is simply the regression intercept necessary to make the asset specific risk of the asset equal to zero. ( Posted: 2010-02-11) to conclude… if coefficients standardized … intercept = no interpretation if coefficients NOT standardized… intercept = risk free rate
What do they mean by standardized? and NOT standardized?
reebs81 Wrote: ------------------------------------------------------- > What do they mean by standardized? and NOT > standardized? Open CFAI PM Book and go to page 431. There is a formula (that we don’t have to remember).
bpdulog Wrote: ------------------------------------------------------- > reebs81 Wrote: > -------------------------------------------------- > ----- > > What do they mean by standardized? and NOT > > standardized? > > > Open CFAI PM Book and go to page 431. There is a > formula (that we don’t have to remember). Thanks. I got it. I would remember it this way. Standardized -> output of a regression.