APT

[ckyeh]

Dear David:

On your webinar 「2010-1[1].a-Foundations」, page 64, and spreadsheet「1_a_5_Grinold_trival_APT」:

APT Amex=SUMPRODUCT($F$7:$I$7,F11:I11)+D11
D11 is 6% ( Forcast), and beta is 1.16.
I think APT Amex should be SUMPRODUCT($F$7:$I$7,F11:I11)+D11(the factor)*1.16(Beta, the exposure )!

Is it correct?

Thanks

 

[David Harper CFA FRM]

Hi ckyeh,

Thanks for a sharp observation! Honestly, when i wrote the spreadsheet, I wanted to include beta. However, if you look at Grinold's table 7.2, it seems that only by excluding the beta can the number match his exhibit (and, my APT numbers do match his, for every security listed.). I therefore inferred that he excluded as a factor, although I had your instinct, too.

... my "rationalization" (explanation) is by way of the industry forecast (e.g., 6% for Amex). I think he made a "design" decision to exclude beta and, if you will, replace with industry forecasts. Note we can view the industry forecast as just another factor loading: exposure = 1.0 (or 0.0) * 6% (or 8% if chemical). So, my interpretation is that the illustrated APT omits an overall market factor of favor of an industry factor.

Thanks, David