Portfolio Concepts

Dear All,

The following is totally confusing:

Reading 60, page 434, Example 14: “BIRR” Model

The BIRR is as it says a Macroeconomic Factor Model. In Table 15, the CFA Curr. treats BIRR as if it were an APT Model - why is that?

Shouldn’t it be modelled as F=Factor Surprise and b=Sensitivity to the Factor Surprise? Rather than Risk Premium for factor j + Sensitivity of the Portfolio to Factor j …


I think the example is showing how to use APT models using Macro economic factors. As long as each factor explains the variation of portfolio returns, you can achive the same results using either model (true in this example).

But your regression depends on each model. And also the intercept term varies. For Macro economic models, the intercept is expected return with the factor senstivities as return surprises. For APT models, the intercept is risk-free, so the factor sensitivites are basically your expected return contributions (not surprises).