1. When developing an equity factor risk model, why is it a good idea to include all of the return variables (the variables used to calculate stocks' alphas) as factors in the risk model?
2. Two widely used methods for constructing equity portfolios are stratified sampling-a type of rule-based approach-and portfolio optimization. What are some of the advantages and disadvantages of each method?
3. Transaction costs comprise two components: explicit costs, such as commissions and fees; and implicit costs, or market impact. What gives rise to market impacts costs? What are typical characteristics of stocks for which their market impact costs tend to be higher?