FRM Part II · FRM Exam Part II · Factors
Which statement best distinguishes macroeconomic factor models from fundamental (characteristic-based) factor models such as Fama-French?
Macroeconomic factor models use economy-wide variables, typically surprises in inflation, growth, or spreads, as factors. Fama-French factors are instead long-short portfolio returns formed by sorting stocks on characteristics like size and book-to-market. The other statements reverse these definitions or add false limits.
- AMacroeconomic models use economy-wide variables such as inflation or GDP surprises as factors, while Fama-French factors are long-short portfolios built from firm characteristicsCorrect
- BMacroeconomic models use long-short portfolios sorted on firm characteristics, while Fama-French uses GDP and inflation surprises
- CMacroeconomic models require no estimation of asset sensitivities, while Fama-French requires time-series regressions
- DMacroeconomic models can only explain bond returns, while Fama-French can only explain equity returns
Explanation
Macroeconomic models regress returns on economic variables (often unexpected changes) such as inflation, GDP growth, or credit spreads. Fama-French factors are return spreads of portfolios sorted on size and book-to-market. The other options reverse the definitions or make false restrictions.
Did you get it right without looking?
One question tells you little. A timed set on Factors shows your real accuracy, how long you take and where you lose marks.
More Factors questions
- Using a three-factor model, a fund's monthly excess return is modeled as: alpha + 1.10×MKT + 0.40×SMB − 0.25×HML. Over a month the factor re…
- A momentum strategy ranks stocks on their cumulative returns over the past 12 months, skipping the most recent month, and goes long the top …
- A fund manager markets a minimum-variance smart beta strategy. Compared with its cap-weighted parent index, which feature should a risk mana…
- Which empirical finding is most commonly cited as a challenge to the CAPM's prediction that beta alone explains cross-sectional expected ret…
- A fund's active return volatility is 4% from a single factor tilt. It adds a second tilt with identical 4% active volatility, equal 50/50 al…
- A pension fund replaces a market-cap-weighted equity index fund with a 'smart beta' fund that selects and weights stocks by fundamental char…