single_factor_model

single_factor_model - Single Factor Model R i = E(R i ) +...

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Unformatted text preview: Single Factor Model R i = E(R i ) + ß i F + e ß i = index of a securities’ particular return to the factor F= some macro factor; in this case F is unanticipated movement; F is commonly related to security returns Assumption: a broad market index like the S&P500 is the common factor Single Index Model Risk Premium Risk Premium Market Risk Premium Market Risk Premium or Index Risk Premium or Index Risk Premium i = the stock’s expected return if the = the stock’s expected return if the market’s excess return is zero market’s excess return is zero ß ß i (r (r m- r- r f ) ) = the component of return due to = the component of return due to movements in the market index movements in the market index (r (r m- r- r f ) ) = 0 = 0 e e i i = firm specific component, not due to market = firm specific component, not due to market movements movements α ( 29 ( 29 e r r r r i f m i i f i +- + =- β α Let: R Let: R i i = (r = (r i- r- r f ) ) R R m m = (r = (r m- r- r f ) ) Risk premium Risk premium format format R R i i = = α α i + ß + ß i (R (R m ) ) + e + e i Risk Premium Format Risk Premium Format Components of Risk...
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This note was uploaded on 05/10/2008 for the course FIN 367 taught by Professor Han during the Spring '08 term at University of Texas.

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single_factor_model - Single Factor Model R i = E(R i ) +...

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