# Reading 44 : Portfolio Risk and Return (P.2)

**4. Explain return generating models (including the market model) and their uses**

are used to estimate the expected returns on risky securities based on specific factors. A simplified ⇒ The market model:**Return generating models**

**R****i** **= ?****i** **+ ?****i ****. R****m ****+ e****i**

**Where: ** i: Return on asset i, Rm : market return.

?i: intercept, ?i = (1-?i ) x Rf

?i : slope coefficient, ei: abnormal return on asset i.

- Multifactor Models: most commonly used macroeconomic, fundamental, statistic factors.

- Macroeconomic factors: GDP growth, inflation, consumer confidence…
- Fundamental factors: earnings, earnings growth, firm size & research expenditures…
- Statistic factors: have no basis in finance theory & specific time period data set.

⇒ The simplest factor is single-factor model (single-index model)

**5. Calculate and interpret beta**

Correlation between the returns on asset i with the return on the market index

- This regression line is referred to as the asset’s
**security characteristic line (SCL)**