The single-index model (SIM) is possibly the simplest asset pricing model that we use in finance to
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Question:
The single-index model (SIM) is possibly the simplest asset pricing model that we use in finance to measure the tradeoff between the systematic risk and return
of a stock. Mathematically the SIM could be expressed as rit − rf = αi + βi(rmt − rf ) + εit, (1) where rit is the (simple) return for security i at time t, rmt is the market return at
time t, rf is the risk-free rate, and εit is the error term. The coefficient βi measures the systematic risk that firm i is facing.
(b) Explain the estimated βi in words.
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