There are two methods for forecasting factors for an APT model: statistical models and structural models. Regarding these two forecasting methods, which of the following is correct?
A. One type of statistical model requires both factor returns and exposures to be forecasted.
B. Structural models assume an underlying economic relationship between factors and stock returns.
C. Structural models are primarily used by academics since they wish to avoid introducing bias into the model.
D. Factors in statistical models are generally intuitive and well-known.
Answer:B
Practitioners primarily use structural models, while academics are the primary users of statistical models. There are three types of structural models and one of them includes the need to forecast both factor returns and exposures. Factors in structural models are intuitive and well-known, while factors in statistical models are implied factors derived through a statistical operation. Structural models assume an underlying economic relationship between factors and stock returns.

 
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