Describe in detail the Single Index model of returns and discuss the advantages and disadvantages of...
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Describe in detail the Single Index model of returns and discuss the advantages and disadvantages of this model compared with the Markowitz model for portfolio optimization. [10 marks] b). Show how the analysis of the effects of the diversification on portfolio risk simplifies when the Single Index model is used instead of the Capital Asset Pricing Model (CAPM). [5 marks] c). "The expected return of a two assets portfolio is a linear combination of the expected returns on the two assets in the portfolio but the risk of the portfolio is not always a linear combination of the two assets risk". Explain this fully by giving a formal definition for expected return and risk of the two assets portfolio, and by discussing different scenarios for both the correlation coefficient and the opportunity sets of risky assets. Describe in detail the Single Index model of returns and discuss the advantages and disadvantages of this model compared with the Markowitz model for portfolio optimization. [10 marks] b). Show how the analysis of the effects of the diversification on portfolio risk simplifies when the Single Index model is used instead of the Capital Asset Pricing Model (CAPM). [5 marks] c). "The expected return of a two assets portfolio is a linear combination of the expected returns on the two assets in the portfolio but the risk of the portfolio is not always a linear combination of the two assets risk". Explain this fully by giving a formal definition for expected return and risk of the two assets portfolio, and by discussing different scenarios for both the correlation coefficient and the opportunity sets of risky assets.
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a Single Index Model The Single Index model also known as the Single Factor model or the Market Model is a simplified approach to asset pricing and portfolio optimization It assumes that the returns o... View the full answer
Related Book For
An Introduction to Management Science Quantitative Approaches to Decision Making
ISBN: 978-1111823610
14th edition
Authors: David R. Anderson, Dennis J. Sweeney, Thomas A. Williams, Jeffrey D. Camm, James J. Cochran
Posted Date:
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