FFE Notes17 Introduction to Factor Models.docVIP

Financial Economics Notes 17 Introduction to Factor Models: the Market Model, the Single-Index Model and the Multi-Index Model Recap: The CAPM The CAPM is represented by both the Capital Market Line (CML) and the Security Market Line. The CML shows efficient portfolios The SML: All portfolios and assets (efficient and inefficient) . The Market Model The Market Model is a statistical model of the way asset returns might be generated: (1) . This is a simple regression equation. The error term, , has the following properties: (2) The formula used to estimate is The Market Model becomes the S