The single-index model
A)greatly reduces the number of required calculations relative to those required by the Markowitz model.
B)enhances the understanding of systematic versus nonsystematic risk.
C)greatly increases the number of required calculations relative to those required by the Markowitz model.
D)greatly reduces the number of required calculations relative to those required by the Markowitz model and enhances the understanding of systematic versus nonsystematic risk.

Question

Quizplus · Accepted Answer

The single-index model simplifies the process of portfolio optimization by reducing the number of calculations needed compared to the Markowitz model, which requires the estimation of the covariance between each pair of assets. Additionally, it helps in understanding the difference between systematic risk (market risk) and nonsystematic risk (specific risk), as it models returns as a function of a single market index plus an error term.

The Single-Index Model