《《Investment 8th Chap008》.docVIP

CHAPTER 8: INDEX MODELS PROBLEM SETS 1. The advantage of the index model, compared to the Markowitz procedure, is the vastly reduced number of estimates required. In addition, the large number of estimates required for the Markowitz procedure can result in large aggregate estimation errors when implementing the procedure. The disadvantage of the index model arises from the model’s assumption that return residuals are uncorrelated. This assumption will be incorrect if the index used omits a significant risk factor. 2. The trade-off entailed in departing from pure indexing in favor of an acti