Ch10 Index Models

Ch10 Index Models - Index Models Chapter 10 Advantages...

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Index Models Chapter 10
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Advantages Reduces the number of inputs for diversification. Easier for security analysts to specialize.
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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.
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Single factor model (r i - r f ) = i + ß i (r m - r f ) + e i α Risk Prem Market Risk Prem or Index Risk Prem i = the stock’s expected return if the market’s excess return is zero ß i (r m - r f ) = the component of return due to movements in the market index (r m - r f ) = 0 e i = firm specific component, not due to market movements r α
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Risk premium Let: R i = (r i - r f ) R m = (r m - r f ) Risk premium R i = α i + ß i (R m ) + e i
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Excess Returns (i) SCL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess
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This note was uploaded on 07/12/2011 for the course FINA 221 taught by Professor Na during the Spring '09 term at HKUST.

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Ch10 Index Models - Index Models Chapter 10 Advantages...

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