Multi factor model macro and fundemental

CFA Level II Equities
#1

Hi, can someone pleases help me understand by what they mean when they say

Factor sensitivities are generally specified first in fundamental factor models, whereas factor sensitivities are estimated last in macroeconomic factor models. Multi factor model

#2

Where in the curriculum (volume, reading, page #) do you see this?

#3

Level 2
Volume 5, Reading Multi factor model Page #465
2nd line in Answer 17

#4

Thanks.

I recalled writing up slides on this for a prep provider six years ago, but I couldn’t find it. (I was looking in Equity, not in Portfolio Management.)

The structure of the models looks the same:

R_i = \alpha_i + \beta_{i,1}F_1 + \cdots + \beta_{i,K}F_K

where:

R_i is the return on asset i

F_k is factor k, k = 1, 2, \ldots, K

\beta_{i,k} is the sensitivity of return R_i to factor F_k

A macroeconomic model might have factors such as inflation, GDP growth, and interest rates. We use data for those factors and known returns on asset i to do a regression analysis and estimate the \beta_{i,k}s. So here the factor returns are data, and the sensitivities are estimated at the end.

A fundamental factor model might have factors such as P/E ratio, net profit margin, and so on. For each company i we compute a set of standardized sensitivities. For the P/E ratio, for example, the standardized sensitivity for company i is:

\beta_{i,P/E} = \frac{Company\ i's\ P/E - mean\ P/E}{\sigma_{P/E}}

Using these sensitivities and known returns, we do a regression analysis to estimate the factor returns: the F_ks. So here the sensitivities are data, and the factor returns are estimated at the end.