Arbitrage Pricing Theory and Multifactor Models of Risk and Return (FRM P1 - Book 1 - Chapter 12)

[@DubbieLuv]

Thanks for explaining this in 20 minutes what my prof couldn't do in 8 hours of lessons

[@analystprep]

Glad it helped! If you like our video lessons, it would be appreciated if you could take 2 minutes of your time to leave us a review here: trustpilot.com/review/analystprep.com

[@ammarkamran4908]

So much better than my professor in my M.Sc program. Thank You.

[@supriyamurdia4989]

"100s of years ago, when I was sitting in my first economics class"! :p

[@GabiTBruno]

Very well explained Dr. Forjan. Thanks for sharing your knowledge with us!

[@analystprep]

You're welcome!

[@satyajitdash5174]

Thanks a million Professor you made the topic quite easy to understand.🙌🙌🙌

[@analystprep]

Glad it was helpful! If you like our video lessons, it would be appreciated if you could take 2 minutes of your time to leave us a review here: trustpilot.com/review/analystprep.com

[@MeanGuy969]

Thank you, Dr. Forjan. This was really insightful.

[@analystprep]

Glad you enjoyed it! If you like our video lessons, it would be appreciated if you could take 2 minutes of your time to leave us a review here: trustpilot.com/review/analystprep.com

[@sarahcates1935]

Hi, thank you for this. I was able to get my homework answers just by fumbling around and looking at examples, but I came looking for a video that would explain to me HOW to think about this so I could understand. This did just that!!! Really appreciate it.

[@analystprep]

Glad it was helpful!

[@johng1907]

That sounds like my children's lives....legend!

[@gbemisolaolayinka7134]

I have nothing to say to you other than i love you. You the best prof..

[@analystprep]

You're welcome.

[@user-kx5ky4dc9n]

« arbitrage sounds like my children’s life » 10:10 the greatest image of arbitrage existence you could make!!

[@timonotter3402]

great video, thank you so much!

[@analystprep]

Glad it was helpful! If you like our video lessons, it would be appreciated if you could leave us a review at www.trustpilot.com/review/analystprep.com

[@jackyyinkiwong7968]

thanks for structuring it so well! love it!

[@treepeenbawlz1934]

Very comprehensive. Thank you Prof Forjan for taking the time to prepare this amazing video

[@analystprep]

You are very welcome. Good luck on your exam!

[@gilbertotargino92]

Excellent lesson teacher , thanks for the free knowledge

[@analystprep]

You are very welcome! If you like our video lessons, it would be helpful to spread the word if you could take 2 minutes of your time to leave us a review at www.trustpilot.com/review/analystprep.com

[@ehsiao412]

Thank you for making the learning experience so pleasant and well explained. ♥️

[@analystprep]

Glad you enjoyed it!

[@manisingh-wk4bn]

You made it look so easy!!

[@CR7scoutbushcrafter1]

Good afternoon Dr. Forjan. I just have a question to confirm if my thinking is correct... At 14:29 when you were talking about hedging away both factor risks and creating a portfolio H (30% CS factor risk, 40% GDP factor risk and 40% risk free rate), in order for the complete portfolio to have the desired attributes (no factor effect- all factors hedged away) the short in portfolio H would have to be combined with the original long position at a 1:1 ratio. Is that correct? Thank you in advance for your answer.

[@vidhyam.r.1344]

Thank you so much sir, you made APT simple to understand

[@analystprep]

You are most welcome

[@MoinulHossain-rw2ry]

What is not much discussed in this multifactor models is that the expected return is also a function of the factors. Anything unexpected is adjusted by the relationship in regression analysis that change in actual return = beta * change in the factor. The change in factor is captured by the the unexpected/suprise change of the factor,

[@user-serachen2021]

thank u for sharing❤

[@analystprep]

You're very welcome! If you like our video lessons, it would be appreciated if you could take 2 minutes of your time to leave us a Google review using this link: g.page/r/CQIlM78xSg01EB0/review

[@Swetter1000]

What I don't understand. On the slide at 05:06 it says that the expected value of a firm specific return is always zero but later on he gives an example that shows up a positive expected return of 10%?

[@Joao-pb5zb]

That's perfect! Thank you very much 🇧🇷

[@analystprep]

Thank you too! If you like our video lessons, it would be helpful to spread the word if you could take 2 minutes of your time to leave us a review at www.trustpilot.com/review/analystprep.com

[@beomkomap]

@@analystprep Hi sir, is the linked provided legit? I tried to access but Chrome prompted as Virus threats. Thanks.

[@pablobravo4533]

Thank you very much! Just a little question, why in the case 3 of hedging exposure to multiple factors do we have to use the risk free asset? Wouldn't it be enough to just short the GDP and CS factor portfolio?

[@mauricioperedo9657]

I love this guy...

[@analystprep]

Glad to hear! If you like our video lessons, it would be helpful if you could take 2 minutes of your time to leave us a review here: www.trustpilot.com/review/analystprep.com

[@investwithvincent6329]

12:00... correct me if I'm wrong but if we want to hedge away the beta factors, we need to construct a portfolio where the weights and the desired beta match?

[@peteradam942]

The polynomial factor weightings calculations are useful in asset pricing.

[@analystprep]

Very true!

[@pallapasr3882]

Thank you!

[@analystprep]

You're welcome!

[@PavanSharma-rp2tq]

could you kindly explain how to construct a CS portfolio or a GDP portfolio? Practically does this mean you are looking for a portfolio that mimics the GDP? Please provide a real life example. Thanks.

[@zeze3883]

THANKS a lot Professor

[@analystprep]

You are welcome! Good lukc on the exam!

[@farhahsukri3324]

can I attend whatever uni you are teaching in? cos my uni is at least 1000x worse than this

[@patrickgold3616]

One factor in the multi-factor model is the expected return of stock i, but isn't the expected return exactly what we are trying to get using the APT? How do we know that beforehand?

[@sandar07321224]

Thank you for sharing

[@CarbonImpulse]

Am i right in saying that using the APT model like at 18:33 that the risk premium is the same as the sensitivity aspect in the two factor model?

[@analystprep]

The excess return on the market factor (risk premium) in the Fama-French model (three-factor model) is similar to the Beta in the CAPM model. The risk premium is used in a lot of financial models to estimate the sensitivity of the asset to market movements.

[@CarbonImpulse]

@@analystprep sorry timestamp was a little off therefore still a bit lost I actually meant the slide at 18:27 but thanks for a quick response

[@patrickgold3616]

Are you not missing an error term on the APT model? or is that on purpose?

[@brtoneal6339]

Hi i dun really understand the step that create beta=1 on one factor and other factors' beta=0, what does that mean??

[@tsunningwah3471]

good

[@asddaasdda4813]

Is beta calculated the same way as with the CAPM?

[@analystprep]

Yes, Beta is always calculated basically the same way. The easiest way to remember it is that B = 1 is the mean, so if you have Beta = 1.5, that is 1.5 times the mean.