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Unformatted text preview: Chapter 10 Single-factor Model: r i = E(r i ) + i F + e i i = sensitivity of asset i to the factor F = the factor in question CAPM is a single-factor model where the markets excess return (above the risk-free rate) is a proxy for all systematic risks, wrapped up into one factor. Separating risk into systematic and non-systematic components is a great idea. However, we can perhaps do better than to say that the market captures all systematic risk in one factor. In other words, there may be several macroeconomic conditions that affect the market, but each one will have different effects on different stocks. Unexpected changes in interest rates will affect financial companies differently than retail companies, and changes in energy prices will affect transportation companies differently from technology companies. But with a one-factor model, we cant separate out interest rate surprises from energy price surprises....
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- Spring '08