Question: QUESTION 3 (TOTAL MARKS: 25] (a) Outline the general regression equation for a single index model and, from this, outline the expected return-beta relationship. Explain

QUESTION 3 (TOTAL MARKS: 25] (a) Outline the general regression equation

QUESTION 3 (TOTAL MARKS: 25] (a) Outline the general regression equation for a single index model and, from this, outline the expected return-beta relationship. Explain what is meant by the Security Characteristic Line, making reference to the alpha and beta estimates. (15 marks) (b) Explain the issues that arise in working with a full Markowitz covariance model and how the single-index model overcomes these issues. (10 marks) QUESTION 3 (TOTAL MARKS: 25] (a) Outline the general regression equation for a single index model and, from this, outline the expected return-beta relationship. Explain what is meant by the Security Characteristic Line, making reference to the alpha and beta estimates. (15 marks) (b) Explain the issues that arise in working with a full Markowitz covariance model and how the single-index model overcomes these issues. (10 marks)

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