FINA 385 Chapter Notes - Chapter 8: Systematic Risk, S&P 500 Index, Explained Variation
25 Apr 2015
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To optimize this portfolio one would need: n n. The variance due to the common market factor. The variance due to firm specific unanticipated events. In this model cov(ri,rj) = b js i. The number of parameter estimates required would be: n = 60 estimates of the mean e(ri), n = 60 estimates of the sensitivity coefficient b n = 60 estimates of the firm-specific variance s 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: a. The standard deviation of each individual stock is given by: i = [b. B = 1. 2, s (ea) = 30%, s (eb) = 40%, and s m = 22% we get: The expected rate of return on a portfolio is the weighted average of the expected returns of the individual securities:
