SIMPLE FACTOR AND SIMPLE INDEX MODEL

Beta(β)In finance, the Beta (β) of a stock or portfolio is a number describing the relation of its returns with those of the financial market as a whole. • An asset has a Beta of zero if its returns change independently of changes in the markets returns. A positive beta means that the assets returns generally follow the markets returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta means that the assets returns generally move opposite the markets returns: one...
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SIMPLE FACTOR AND SIMPLE INDEX MODEL CHAPTER FOUR: SIMPLE FACTOR AND SIMPLE INDEX MODEL06/08/2011 1 SIMPLE ONE-FACTOR MODEL Re = Rf + ß(Rm – Rf) What is the only factor in the model?06/08/2011 2 Beta(β) In finance, the Beta (β) of a stock or portfolio is a number describing the relation of its returns with those of the financial market as a whole.• An asset has a Beta of zero if its returns change independently of changes in the markets returns. A positive beta means that the assets returns generally follow the markets returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta means that the assets returns generally move opposite the markets returns: one will tend to be above its average when the other is below its average. 06/08/2011 3 Beta(β)• The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the assets statistical variance that cannot be removed by the diversification provided by the portfolio of many risky assets, because of the correlation of its returns with the returns of the other assets that are in the portfolio. Beta can be estimated for individual companies using regression analysis against a stock market index.06/08/2011 4 MULTI-FACTOR MODEL E(Ri) = Rf +ß1if1 +ß2if2 + … + ßkifk Which factors affect the model?06/08/2011 5