Question

Which of the following must be done to test the multifactor CAPM or the APT? 1. 1) Specify the risk factors 2. II) Identify portfolios that hedge the risk factors 3. III) Test the explanatory power of hedge portfolios 4. IV) Test the risk premiums of hedge portfolios I, II, and IV I and II I, II, III, and IV II and IV II and III

Answer 1

To test the multifactor CAPM or the APT, the following steps must be taken:

Specify the risk factors

Identify portfolios that hedge the risk factors

Test the explanatory power of the hedge portfolios

Test the risk premiums of the hedge portfolios

Therefore, all of the given options are correct.

The correct answer is (III) I, II, III, and IV.