## Answer

We use fundamental analysis to determine the five factors that are included in our asset pricing model. The five factors we use are **Size, Leverage, Profit, Investment, and Term Spread. **The first four factors are extracted from the companyâ€™s financial statements at each reporting date. These factors can be explained as follows:

The **Size **risk factor is calculated as the Total Assets of the companies, measured in USD. We use the logarithm transformation for this.

Our measure for the **Profit **risk factor is calculated as Operating Profit Margin, which is the operating profit (Profit before Taxes)/ Revenues. We measure revenues as the sum of the operational and financial revenues.

The **Investment **factor is the percentage of Capital Expenditures (cap ex) to the total assets.

The **Leverage** factor is the ratio of the current and non-current liabilities (Total Liabilities) to the total assets of the firm.

And finally, the **Term Spread** is the difference between a risk-free long-term bond (20 years) and a risk-free short-term asset (3 months) for all the companies on each reporting date. The Term Spread risk factor can furthermore be used as a proxy for country risk.