Explanation:
SDF is denoted as m in the multifactor model. The SDF can be described as an index of bad times, which are indexed by many distinct factors and different states of nature. The single variable m is used to capture all the bad times, providing an extremely powerful notation to capture bad times with multiple variables. The CAPM is a special case of this model, where m is linear in the market return. That is,
Where a and b are constants.
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Q.4590 Multifactor models use the stochastic discount factor (SDF) to define bad times over multiple factors. Which of the following statements is most likely true about SDF?
A
The SDF represents an index of bad times
B
The CAPM is a special case of this SDF model
C
The SDF is also called a pricing kernel
D
All of the above
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