CHAPTER FOUR: SIMPLE FACTOR AND SIMPLE INDEX MODEL
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SIMPLE ONE-FACTOR MODEL
Re = Rf + ß(Rm – Rf) What is the only factor in the model?
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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 in the market's changes independently of returns. A positive beta means that the asset's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together, or both tend to be respective averages together. A below their negative beta means that the asset's returns generally move opposite the market's returns: one will tend to be above its average when the other is below its average.
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(CAPM).
Beta(β) • The beta coefficient is a key parameter in the It capital asset pricing model measures the part of the asset's 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 individual companies using estimated for regression analysis against a stock market index.
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MULTI-FACTOR MODEL
E(Ri) = Rf +ß1if1 +ß2if2 + … + ßkifk
Which factors affect the model?
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