chapter 8 question -Reply

Rich Davey ( RDAVO@allstate.com )
Thu, 02 Jul 1998 09:57:48 -0600

As far as your second question goes, the reason there is no 'noise' is
because you are calculating an estimated return, not actual. Actual
would have 'noise' that you can't predict. In calculating the estimated
return, you have no way to estimate that 'noise', therefore you must
assume that 'noise' = 0. It's like in statistics (regression) where we
know there is an error in the model but we assume that is normally
distributed with mean = 0. Same thing here. Does this make sense or am
I out to lunch on this?

Can't help with the first part, don't have my CAS manual with me.

>>> Michael McKenney <mmckenne@ins.state.pa.us> 07/02/98 08:06am
>>>
Does anyone want to take a stab at explaining the study guide chapter 8
number 11 (b) to me?

What does 'realized factor returns' mean?
Why are they treated the same as the risk premium (i.e. why don't we
have
to subtract out the risk-free rate on interest)?
Why do we add this to the expected rate of return to get the probable
one-year realized return?

While I'm at it, I have another question. Why in this same exmple (Study
Guide #11) which is the same as Book Quiz # 10, is there no unique risk
involved, i.e. no 'noise'. I would think the solution to each part of #10
in the Book Quiz should be some number a + the result given by the book
answer, where a is the 'noise' that Chapter 8 explains each stock as
containing when describing the Arbritage Pricing Theory.

Once again, I plead for HELP!!!!