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Multifactor Model
sheida fazeli
Created on November 2, 2023
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MULTIFACTOR MODEL
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Financial Instruments and Markets Prof: P. Cincinelli
Parisa AsadollahiMatin RouzehkhahSheida Fazeli Elvan Simsek
MULTIFACTOR MODEL
Introduction
CAPM
Multifactor
Capital Asset Pricing Model
Fama-French
Conducting an investigation to ascertain whether a multifactor model possesses the capability to effectively capture the sensitivity of excess returns to various risk factors.
Goal
Excess returns
Part 1
Exceptional features
Summary statistics
Summary statistics
Time Series Analysis
Part 2
book-to-market value
momentum factor
Size
Time Series Analysis
How sensitive are excess returns to risk factors?
Betas coefficients from OLS time series regressions
Cross Section Analysis
Part 3
Can risk exposures explain the variation between the portfolios mean returns?
Cross Section Analysis
Can risk exposures explain the variation between the portfolios mean returns?
Cross Section Analysis
Can risk exposures explain the variation between the portfolios mean returns?
Conclusion
MULTIFACTOR MODEL vs. CAPM
- Multifactor models explain security returns better than CAPM by considering additional factors and addressing anomalies. They also provide a clearer understanding of the volatility in financial markets.
- Observational data indicates that RMRF, or the risk premium factor, plays a crucial role in capturing and elucidating the volatility of portfolios, particularly those of significant size.