BUS 315 Lecture 8: Solutions_Ch_8

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 315
• Professor: Jacky Shen

Document Summary

To optimize this portfolio one would need: n n n2 n. = 1890 total estimates: in a single-index model: ri rf = i + i(rm rf) + ei the variance of the rate i 2. M the variance due to the common market factor of return on each stock can be decomposed into the components: (l) 2 (2) 2(ei) the variance due to firm specific unanticipated events. In this model cov(ri,rj) = i j 2 required would be: The number of parameter estimates n = 60 estimates of the mean e(ri), n = 60 estimates of the sensitivity coefficient i, n = 60 estimates of the firm-specific variance 2(ei), and. Thus, the single-index model reduces the total number of required parameter estimates from 1,890 to 182 and in general from (n2 + 3n)/2 to 3n + 2. The standard deviation of each individual stock is given by.