Page 26 - FINAL CFA SLIDES DECEMBER 2018 DAY 12
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Session Unit 12:
42. Portfolio Risk and Return: Part II
Examples of single (index) factor, p.156
A simplied form of single-index is the market model:
tanties
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α β are estimated from historical return data;
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• α = Rf * (1 – β ) to be consistent with the general
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form of a single-index model in excess returns form.
• ER on Asset i is α + β E(R ).
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• A deviation from ER in a period is the abnormal
return on Asset i, e, or R – (α + β R ).
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• Factor sensitivity or beta for Asset i is a measure of
how sensitive the return on Asset i is to the return
on the overall market portfolio (market index).
