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The single-index model Select one: a
The single-index model
Select one:
a. greatly reduces the number of required calculations relative to those required by the Markowitz model and enhances the understanding of systematic versus non-systematic risk
b. enhances the understanding of systematic versus non-systematic risk and greatly increases the number of required calculations relative to those required by the Markowitz model
c. greatly increases the number of required calculations relative to those required by the Markowitz model
d. None of the above
Expert Solution
Answer:
The single-index model
a. greatly reduces the number of required calculations relative to those required by the Markowitz model and enhances the understanding of systematic versus non-systematic risk.
The single-index model is a simple asset pricing model to measure both the risk and the return of a stock.
According to this model, the return of any stock can be decomposed into the expected excess return of the individual stock due to firm-specific factors, commonly denoted by its alpha coefficient (α), the return due to macroeconomic events that affect the market, and the unexpected microeconomic events that affect only the firm.
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