cityboy

happyking02 Wrote:
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> How about the multifactor model that follows in
> the CFAI? can anyone please explain the difference
> of formula 3a and 3b, (CFAI Vol 3, Page 31)


3a is for variance (variance with itself)
and 3b for covariance (variance with another variable)

The basic model: return is driven by a couple of drivers (factors).

In a sense, the CAPM is a specific case of the multi-factor case since you have only ONE variable: the market itself.

It should be noted that CAPM requires that market is in equilibrium, while multi factor model does not.