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There exist a lot of way to choose risk factors and the choice differs according to the kind of underlying assets. In your case, particularly, since the portfolio is composed by currencies, I would choose the risk factors mainly among all the macroeconomic variables available in your dataset or data provider. After that, to choose on which of them basing ...


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Yes, those are probably the variables that predict the better the stock market return. However, the OOS evidence is usually weak. Goyal & Welch provide a good summary on predictors: http://rfs.oxfordjournals.org/content/21/4/1455.abstract


0

Market beta just tells your portfolio has low covariance, scaled by variance, with the market. Remember that $$ \beta= \frac{Cov(x,y)}{Var(x)} = \rho\frac{\sigma_x \sigma_y}{\sigma_x^2}=\rho\frac{\sigma_y}{\sigma_x} $$ You can see that it well may be that $\sigma_x<\sigma_y$ but $\rho$ is small enough to have a beta of 0.5. By the way, you can directly ...



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