Assume that stock market returns do follow a single-index structure. An investment fund analyzes 125 stocks in order to construct a mean-variance efficient portfolio constrained by 125 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.
A) 125; 15,225
B) 15,625; 125
C) 7,750; 125
D) 125; 125

Question

Quizplus · Accepted Answer

In a single-index model, each stock's return is related to a single macroeconomic factor. Therefore, for 125 stocks, the fund needs to calculate 125 estimates of expected returns (one for each stock) and 125 estimates of sensitivity coefficients (beta values) to the macroeconomic factor (one beta for each stock).

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