I don’t know if I should be asking this or not…but I have a query in portfolio management multifactor model, where we calculated return by surprises in the economy.
The formula says actual minus predicted factors multiplied by factor sensitivities…if in the economy we predicted low inflation and actual is slightly high, we add it to the intercept (expected return), and if GDP growth is less than expected, shouldn’t we add surprise to expected return as economy is not performing the way it was predicted, hence we require higher return for the same?
I know there is a difference between required and expected return but it just is a doubt as I am unable to digest the question I was solving
You are unnecessarily overthinking.
The sign of the beta coefficients tackles the problem of whether a positive or negative surprise should lead to higher or lower Actual return vs Expected Return.