One "cost" of the single-index model is that it
A) is virtually impossible to apply.
B) prohibits specialization of efforts within the security analysis industry.
C) requires forecasts of the money supply.
D) is legally prohibited by the SEC.
E) allows for only two kinds of risk-macro risk and micro risk.

Question

Quizplus · Accepted Answer

The single-index model simplifies the complex relationships between different securities by relating the returns of each security to a single common factor, typically the market return. This model recognizes two types of risk: systematic (macro) risk, which affects all securities, and unsystematic (micro) risk, which affects individual securities. This simplification is a "cost" because it overlooks other potential sources of risk.

One "Cost" of the Single-Index Model Is That It