Assume that stock market returns do follow a single-index structure. An investment fund analyzes 750 stocks in order to construct a mean-variance efficient portfolio constrained by 750 investments. They will need to calculate ________ estimates of firm-specific variances and ________ estimate/estimate(s) for the variance of the macroeconomic factor.
A) 750; 1
B) 750; 750
C) 124,750; 1
D) 124,750; 750
E) 562,500; 750

Question

Quizplus · Accepted Answer

In a single-index model, each stock's return is related to a single macroeconomic factor, requiring the calculation of one firm-specific variance per stock (750 in total) and one estimate for the variance of the macroeconomic factor.

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