Can someone detail their understanding of the differences in these models?
APT provides little identification of risk factors, its different from fundamental factor i think
Completely different models: APT: Intercept = Rf Fund. Multi Factor: Intercept = Expected rate when factor sensitivities are zero (Expected return of avge stock) APT: The multiple “Risk Premiums” are the premiums ABOVE Rf that result from a portfolio exposed only to that RISK FMF Model: The factors = returns associated with various fundamental factors APT: Sensitivities = regression sensitivities for each risk factor FMF Model: Sensitivities = STANDARDIZED sensitivities for each Fundamental factor (ie (Factor - Avg Factor)/ Sigma of factor). Not from regression APT: No-Arb assumption (FMF Model doesn’t have this) Hope that helps.
McLeod81 Wrote: ------------------------------------------------------- > Completely different models: > > APT: Intercept = Rf > > Fund. Multi Factor: Intercept = Expected rate when > factor sensitivities are zero (Expected return of > avge stock) I thought this was the expected return for stocks with factor sensitivities equal to the market-wide average…? > > APT: The multiple “Risk Premiums” are the premiums > ABOVE Rf that result from a portfolio exposed only > to that RISK > > FMF Model: The factors = returns associated with > various fundamental factors > > APT: Sensitivities = regression sensitivities for > each risk factor > > FMF Model: Sensitivities = STANDARDIZED > sensitivities for each Fundamental factor (ie > (Factor - Avg Factor)/ Sigma of factor). Not from > regression > > APT: No-Arb assumption (FMF Model doesn’t have > this) > > Hope that helps. Thanks for the breakdown. You are going to kill this thing McLeod.
Thanks Mwvt. 2 more weeks to study our a$$es off so that we don’t have to sit and worry about the outcome all summer.
Did you see the point I made above. I would like your thoughts if you have the time. You might not have to worry, but I will be… 
The intercept is equal to the E® for a stock that has fundamental factors sensitivities equal to the market-wide averages. This will be the E® for a stock with the average fundamental factors (P/E, P/B, EPS, or whatever). Since the FFM uses standardized sensitivities and not regression slopes: Stock avg. Sensitivity = (P/E - P/E avg) / Sigma avg P/E = P/E avg, so the Standardized sensitivity = 0 (ie zero standard deviations from the norm). Does that make sense?
Perfect sense. All terms will cancel except the intercept. Well explained.