Asked by Emily Treadaway on Jun 23, 2024
Verified
Assume that stock market returns do follow a single-index structure. An investment fund analyzes 175 stocks in order to construct a mean-variance efficient portfolio constrained by 175 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.
A) 175; 15,225
B) 175; 175
C) 15,225; 175
D) 15,225; 15,225
Single-Index Structure
An investment model that relates the returns on a stock to the returns on a common market index using a linear relationship.
Expected Returns
The anticipated profit or loss from an investment over a specific period, based on historical or projected performance.
Sensitivity Coefficients
Numbers that measure how much a dependent variable changes when an independent variable changes by one unit, often used in financial models to gauge risk.
- Determine the necessary covariances and variances for creating a portfolio that is efficient in terms of mean-variance under diverse market conditions.
Verified Answer
EC
Elizabeth Calleja GarciaJun 30, 2024
Final Answer :
B
Explanation :
In a single-index model, each stock's return is related to a single macroeconomic factor. Therefore, for 175 stocks, the fund needs to calculate 175 estimates of expected returns (one for each stock) and 175 estimates of sensitivity coefficients (beta values) to the macroeconomic factor (one beta for each stock).
Learning Objectives
- Determine the necessary covariances and variances for creating a portfolio that is efficient in terms of mean-variance under diverse market conditions.