17. B is correct. The intercept is not interpreted as an expected return by both models. Model 1 is
a macroeconomic factor model. In this model, the intercept value is the expected return
on the stock. Model 2 is a fundamental factor model. In fundamental factor models, the
factors are given as returns rather than return surprises to predicted values so they do not
generally have expected values of zero. This changes the meaning of the intercept, which is
no longer interpreted as the expected return. A & C are correct statements. Section 4.2.-4.3.
LO.d.
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