Assume that stock market returns do follow a single-index structure.An investment fund analyzes 200 stocks in order to construct a mean-variance efficient portfolio constrained by 200 investments.They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.
A) 200;19,900
B) 200;200
C) 19,900;200
D) 19,900;19.900
E) none of these

Question

Quizplus · Accepted Answer

For a single-index structure, we only need to estimate one sensitivity coefficient per stock with respect to the macroeconomic factor (the index). Therefore, we would need 200 estimates of expected returns and 200 estimates of sensitivity coefficients, resulting in a total of 400 estimates. Hence, choice B (200;200) is the correct answer.

Assume That Stock Market Returns Do Follow a Single-Index Structure