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Creating portfolio risk and return models [8]

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Bullet points include: E.g. for econometric models, where rj,t is return on security j, xk,t is return (or movement) on some underlying factor (e.g. oil prices) and eta j,t is unexplained (presumed random) term for security j, we generally seek to solve the following regression (alpha) and (beta) deliberately evoke regression idea (and CAPM / APT) Least squares regression can be solved using matrix algebra, explaining link with factor models of the sort characterised by formulae like:

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