- Single-index model
The single-index model (SIM) is an
asset pricing model commonly used in thefinance industry to measure risk and return of astock . Mathematically the SIM is expressed as::
:
where:
: "rit" − "rf" is the return on the stock: "ai" is the company's alpha : "Bi" is the company's beta: "rmt" − "rf" is the return on the market index: "Eit" is the residual return
The accuracy of the model is enhanced by the stock return's influence by market (beta) and firm-specific risk factors (alpha), unexpected returns (residual) and the relation to the performance of a market index (such as the All Ordinaries). Security analysts often use the SIM for such functions as computing stock betas, evaluating stock selection skills, and conducting event studies.
Assumptions of single-index model
1.the return On the security besides the fundamental fact is guided by index can also be calculated by the associated with the index.
*Yip, Henry 2005: Spreadsheet Applications to securities valuation and investment theories, John Wiley and Sons Australia Ltd
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