Question: Explan and comment on below all the main assumptions underlying the Single Index Model (SIM). a)The returns on stocks tend to change in a similar

  1. Explan and comment on below all the main assumptions underlying the Single Index Model (SIM).

a)The returns on stocks tend to change in a similar fashion as the average return on the market.

b)The deviations of stock returns from their expected values are uncorrelated with returns on the market or Cov(ei,Rm)=0

c)The deviations of stock returns from their expected values are uncorrelated with each other or Cov(ei,ej)=0

2.Discuss SIM utility in a modern finance environment.

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