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Single Index Model

The Single Index Model (SIM) is an asset pricing model that decomposes influences on a stock's returns into a systematic factor based on the broad market index return and firm-specific factors. Mathematically, the SIM expresses the return on a stock as the company's alpha, the company's beta multiplied by the return on the market index, and a residual return. Security analysts often use the SIM to compute stock betas, evaluate stock selection skills, and conduct event studies by measuring a stock's return influence from market and firm-specific risk factors.

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Ishtiaq Hasnat Chowdhury Ratul
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256 views1 page

Single Index Model

The Single Index Model (SIM) is an asset pricing model that decomposes influences on a stock's returns into a systematic factor based on the broad market index return and firm-specific factors. Mathematically, the SIM expresses the return on a stock as the company's alpha, the company's beta multiplied by the return on the market index, and a residual return. Security analysts often use the SIM to compute stock betas, evaluate stock selection skills, and conduct event studies by measuring a stock's return influence from market and firm-specific risk factors.

Uploaded by

Ishtiaq Hasnat Chowdhury Ratul
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Single index model A model of stock returns that decomposes influences on returns into a systematic factor, as measured by the

return on the broad market index, and firm specific factors. The Single Index Model (SIM) is an asset pricing model commonly used in the finance industry to measure risk and return of a stock. Mathematically the SIM is expressed as: (rit rf) = ai + Bi(rmt rf) + Eit Where:

rit rf is the return on the stock ai is the company's alpha Bi is the company's beta rmt rf is the return on the market index Eit is the residual return

The accuracy of the model is enhanced by the stock return's influence by market (beta) and firm-specific risk factors (alpha), unexpected returns (residual) and the relation to the performance of a market index (such as the All Ordinaries). Security analysts often use the SIM for such functions as computing stock betas, evaluating stock selection skills, and conducting event studies. Assumptions of Single index model 1.the return On the security besides the fundamental fact is guided by index can also be calculated by the associated with the index.

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