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Which of the following is correct? Group of answer choicesNone of the other answers are correct. Principal Components Analysis provides a way to select the
Which of the following is correct? Group of answer choicesNone of the other answers are correct. Principal Components Analysis provides a way to select the relevant factors from a selection of macroeconomic variables. We can estimate risk premiums using a time series regression of returns on factors. If we use a portfolio to proxy for the risk factor, the risk premium can be computed directly as the average portfolio return. For macroeconomic risk factors, the expected return of the factor equals the risk premium.
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