Single Index Model & CAPM Flashcards
what is the one factor that the single index model believes is the common influence to stocks
market index
what does alpha represent in the single index model
unique risk
what does beta represent in the single index model
universal risk
do you need 1 alpha for all the assets or one for each
one for each
do you need 1 bet for all the assets or one for each
ONE for each
why is single index model more efficient than markowitz mode
no pairwise covariance matrix
just look at how each individual asset through their common relationship with the market, ignoring their independent relationships with each other
if the alpha is positive should you long or short
long
if the alpha is negative should you long or short
short
what is used to estimate beta in excel
slope function of historical data
how to pick amount of historical data to use to predict beta
short period = more accurate
but could also be affected by special events in short period
if alpha is higher should weight be higher or lower
higher
if alpha is lower should asset weight be higher or lower
lower
drawbacks to the single index model
over simplifies the world
morkowitx will include correlation and will place smaller weight of correlated assets
single index model doesn’t know correlations so could actually pick highly correlated stock
what is alpha in CAPM
0
what are the restrictive assumptions of the CAPM model
no transaction costs
assets are infinitely divisible
no personal income tax
an individual cannot affect the price of stock
investors make rational decisions
unlimited shorts are allowed
unlimited borrowing allowed
all assets can be sold and bought
