the return on the market size factor. This means that, holding all other things constant, an increase in the return to market size will lead to an increase in asset l's return. Similarly, the same increase will lead to a decrease in asset 2's return, again, holding all things equal. The exposures govern the sensitivity between the returns on the factors and the returns on the assets. Figure 20.3 shows the relationship between the time exposures and total returns computed. Note that in the linear factor risk model, we try to explain the cross section of asset returns at a point in time (time t) in terms of exposures as of the previous period. SOME IMPORTANT PRACTICAL CONSIDERATIONS Futures Some assets represent composites-that is, they consist of one or more assets. An example of this is a futures contract on a stock index (e.g., S&P 500 futures). In this case, the overall risk (and return) provided by the futures contract depends on the value of the underlying index (e.g., S&P 500 index). We recommend that practitioners compute the exposure of this contract to factors as follows: Step 1 Identify each asset contained in the underlying index. Step 2 Compute the factor exposures of each asset using the methodology described earlier. Step 3 Multiply the weight of each asset in the index by the asset exposure. Step 4 The futures contract's exposure to a particular factor is given by the sum of the values computed in step 3 for that factor. ADRs and GDRs American depositary receipts (ADRs) are securities traded in the United States and issued by U.S. depository institutions that represent equity shares of foreign-based companies. For U.S. investors, ADRs provide an alternative to investing in overseas equities directly without the inconveniences such as currency conversion and foreign settlement procedures. For non-U.S. investors, ADRs provide an alternative way to own shares of a company without holding its stock locally. Holders of ADRs, will not have exposure to the same level of currency risk as those who hold the underlying stock in its original country of domicile.   Exposures Total return               (-1 t FIGURE 20.3 Time Line of Exposures