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By Edwin Burmeister; Richard Roll; Stephen A. Ross; Edwin J. Elton; Martin J. Gruber; Richard Grinold and Ronald N. Kahn

ISBN-10: 0943205247

ISBN-13: 9780943205243

This monograph provides the paintings of 3 teams of specialists addressing using single-factor types to provide an explanation for safety returns: Edwin Burmeister, Richard Roll, and Stephen Ross clarify the fundamentals of Arbitrage Pricing conception and talk about the macroeconomic forces which are the underlying resources of hazard; Edwin J. Elton and Martin J. Gruber current multi-index types and supply counsel on their reliability and usability; and Richard C. Grinold and Ronald N. Kahn deal with multiple-factor types for portfolio possibility.

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Extra info for A Practitioner's Guide to Factor Models

Example text

Although the indexes produced by factor analysis need not be orthogonal to l5 In addition, researchers often want to construct the indexes from a larger sample of stocks or to have other properties such as being widely diversified. See, for example, Lehrnann and Modest (1988). l6 For example, in a single-index model, beta has been shown to be positively related to residual variance. Thus, a principal components estimation of the single-index model can lead to false inferences about beta.

8 1 '. --. '. -_ 0 0. -... I I I 2 3 4 - ... I . /. /. / . I 5 6 Number of Factors I I I 7 8 9 10 Group 1 - - - Group 2 . . . Group 3 Group 4 factor from a second sample or even a linear combination,of the first, second, third, and fourth factors from the second sample. * This problem can be corrected by canonical correlation. For an n-factor solution, find that linear combination of the n factors from one sample that is most highly correlated with the best linear combination of the n factors from a second sample.

The second is the portfolio approach introduced by Chen (1983). In the group, or multisample, approach, securities are divided into samples and maximum likelihood factor analysis is used to extract factors from each sample. The difficulty with this approach is that, because of indeterminacy, the factors extracted in each sample need not be extracted in the same order or even with the same sign. How then can one determine whether the same factors or different factors (unique to each group) have been extracted in going from group to group?

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A Practitioner's Guide to Factor Models by Edwin Burmeister; Richard Roll; Stephen A. Ross; Edwin J. Elton; Martin J. Gruber; Richard Grinold and Ronald N. Kahn


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