In the PM book of schweser on page 230, it was mentioned that the expected value of factors and the random errors equal zero. Can someone explain this please. Thanks in advance.
expected value of random errors is typically zero - nothing really to explain expected value of factors is zero by definition for macroeconomic models as it reflects expected conditions (intercept equals expected stock return) if there is a macroeconomic surprise, the factor will be equal to that magnitude of the surprise or actual macroeconomic number minus its expected value. For example, r = 12% + 3*CPI + e and expected CPI = 3% if CPI = 3%, then r = 12% if CPI = 4%, then surprise = 4%-3% = 1% -> r = 12%+3%=15%
Thanks for kind explanation.
so in those macroeconomic surprise folumla sh*t’s, (sorry im just bitter tonight, g/f is giving me sh*t) the variables are in excess of what is expected. sooooo if r = 12 + 3*CPI + e CPI (expected) = 3 and CPI = 3 then CPI variable in the equation is 0 and if CPI = 4 then CPI variable in the equation is 1