Chapter 6 Question 705.3

[v.modaher]

hello all,

can anyone explain why on question 705.3 in chapter 6 Multifactor Models of Risk-Adjusted Asset Returns. You multiple the beta of the interest rates by -1 in the solution? Is this because the beta is written as (0.5) which implies the value is negative?

many thanks

 

[David Harper CFA FRM]

Hi @v.modaher Yes, the "(0.50)" is meant to convey a negative beta, otherwise denoted "-0.50" such that the unexpected return is given by (emphasis mine) the expression: 0.80*(2.0 - 1.0%) + (-0.50)*(1.0% - 1.0%) + 1.30*(1.5% - 0.5%). Thanks, David

 

[v.modaher]

Hi @v.modaher Yes, the "(0.50)" is meant to convey a negative beta, otherwise denoted "-0.50" such that the unexpected return is given by (emphasis mine) the expression: 0.80*(2.0 - 1.0%) + (-0.50)*(1.0% - 1.0%) + 1.30*(1.5% - 0.5%). Thanks, David

Thank you David