medium · FRM Part 1 Foundations of Risk Management
An analyst regresses a stock's excess returns against the Fama-French three factors and finds an R^2 of 0.92. A CAPM regression for the same stock shows an R^2 of 0.65.
What is the best interpretation of this difference?
- The CAPM's single factor misses significant systematic risk related to size and value tilts.
- The three-factor regression is suffering from multicollinearity, making its R^2 figure unreliable.
- The stock carries a high degree of idiosyncratic risk that neither model manages to capture.
- The stock is currently overpriced, as is indicated by the comparatively lower CAPM R^2 value.
Sign up free to see the explanation and track your rank →
More FRM Part 1 Foundations of Risk Management practice
- In the context of the CAPM, what is the definition of 'Alpha' (α)?
- What is the calculated Sortino Ratio?
- If two portfolios have the same Sharpe ratio but one has positive skewness and the other h
- If the correlation between the portfolio and the new asset is 0.0, and the manager allocat
- What is its approximate yield to maturity (YTM)?
- The BCBS 239 principle of 'Timeliness' suggests that risk reporting should be more frequen
- An investor adds a momentum factor (WML) to a Fama-French three-factor model. This new mod
- In a 'Liquidity Spiral', what is the primary channel by which market liquidity risk and fu