MULTI-FACTOR MODEL

A financial model which uses numerous variable in its calculations to demonstrate market equilibrium and/or phenomena in asset prices. This model can be used to rationalize either an underlying security or a portfolio of securities by assimilating two or more variables to assess relationships between these factors and its performance.

Variables are measured using this formula:

Ri = ai + βi(m) Rm + βi(1)F1 + βi(2)F2 +…+βi(N)FN + ei

Where:

Ri = returns of security i Rm = the market revenue F(1,2,3…N) = every factors used β = the beta with respect to every factor including the market (m) e = the error term a = the intercept

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