6 Questions
What is a key advantage of using a purely statistical model for returns?
It allows us to easily figure out the covariance of two assets.
How are the error terms in the statistical asset pricing equation related to each other?
They have a zero covariance because they are defined as uncorrelated.
What is the relationship between the factors F1, F2, and F3 in the statistical model?
They are not correlated with each other.
What are the key components of the covariance equation for two assets in a statistical model?
The variances of the factors and the exposure to those factors.
What are the 'a's' in the statistical asset pricing equation?
The constants, representing the expected returns of the assets.
What are statistical models used for, in addition to determining expected returns?
Determining covariances.
Learn about the strengths of statistical models in asset pricing, including calculating covariance between two assets. Understand how to apply a 3-factor equation to determine covariance, and how error terms and constants are involved.
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