Risk factors
Encyclopedia
A risk factor
Risk factor
In epidemiology, a risk factor is a variable associated with an increased risk of disease or infection. Sometimes, determinant is also used, being a variable associated with either increased or decreased risk.-Correlation vs causation:...

 is a concept in finance theory such as the CAPM
Capital asset pricing model
In finance, the capital asset pricing model is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk...

, APT
Arbitrage pricing theory
In finance, arbitrage pricing theory is a general theory of asset pricing that holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a...

 and other theories that use pricing kernels. In these models, the rate of return
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...

 of an asset (hence the converse its price) is a random variable
Random variable
In probability and statistics, a random variable or stochastic variable is, roughly speaking, a variable whose value results from a measurement on some type of random process. Formally, it is a function from a probability space, typically to the real numbers, which is measurable functionmeasurable...

 whose realization in any time period is a linear combination
Linear combination
In mathematics, a linear combination is an expression constructed from a set of terms by multiplying each term by a constant and adding the results...

 of other random variable
Random variable
In probability and statistics, a random variable or stochastic variable is, roughly speaking, a variable whose value results from a measurement on some type of random process. Formally, it is a function from a probability space, typically to the real numbers, which is measurable functionmeasurable...

s plus a disturbance term or white noise
White noise
White noise is a random signal with a flat power spectral density. In other words, the signal contains equal power within a fixed bandwidth at any center frequency...

.
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