The macroeconomic models assume that the returns to each asset are correlated with ______.

A. only the surprises in some factors
B. only the actual values of some factors
C. only the expected values of some factors

Correct Answer: A

The factors can be understood as affecting either the expected future cash flows of companies or the interest rate used to discount these cash flows back to the present and are meant to be uncorrelated. A surprise is the difference between actual value and expected value.