What's the easiest way to...

CFA Level II
#1

What’s the easiest way to understand the following terms, their differences…etc? For instance, the intercept term is asset’s expected return of the portfolio under the macroeconomic factor, while the intercept is the risk-free rate under the arbitrage pricing theory. The Macroeconomic Factor Model The Fundamental Factor Model The Arbitrage Pricing Theory (APT)

#2

This is what I think of it, please correct me if I am wrong. APT helps us calculate return on a stock using both systematic and unsystematic risk. CAPM is a special case of APT where we measure only systematic risk. While Macroeconomic and Fundamental Factor model try to include both systematic and unsystematic risk. Both are models of APT too. Macroeconomic model is more of a surprise model where the expected return is given and then adjusted for surprise factors. That is why the expected return is the intercept.

#3

All of the above statements are correct, idreesz … :slight_smile:

#4

i think macroeconomic factor model is different from APT model because APT is equilibrium pricing model, and macro factor model is not. APT’s intercept is risk free rate, and macro factor model’s intercept is asset’s expected return. APT’s factor premium is price of risk while macro factor model includes unexpected surprises… please correct if i’m wrong.

#5

all of this looks right. theres a page in schweser with a few bullet points with key diff between macro and factor. cant remember them now but among them are the macro is surprise model, factor is fundamentla values whereas macro is more arbitary, beta is foud by regresison in macro but found differently in factor (forgot how)

#6

Skies Wrote: ------------------------------------------------------- > i think macroeconomic factor model is different > from APT model because APT is equilibrium pricing > model, and macro factor model is not. APT’s > intercept is risk free rate, and macro factor > model’s intercept is asset’s expected return. > APT’s factor premium is price of risk while macro > factor model includes unexpected surprises… > > please correct if i’m wrong. I concur.