To use the market model with 25 securities to include in the portfolio, the number of parameters the analyst must estimate is
A) 27.
B) 300.
C) 125.
D) 77.

Question

Quizplus · Accepted Answer

To use the market model, the analyst needs to estimate parameters for each of the 25 securities, as well as parameters for the market portfolio.

For each security, the analyst needs to estimate two parameters - the intercept and the slope. Therefore, the analyst needs to estimate 2 x 25 = 50 parameters for the individual securities.

In addition, the analyst needs to estimate two parameters for the market portfolio - the intercept and the slope.

Therefore, the total number of parameters that the analyst needs to estimate is 50 + 2 = 77.

Therefore, the correct answer is D) 77.

To Use the Market Model with 25 Securities to Include