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What is Understanding the Single-Index Model about?

The single-index model assumes that the return of each asset depends on the return of the market index. It allows estimating the correlation between any two assets based on their beta (sensitivity to market movements) and the variance of the market index. This significantly reduces the number of correlations that need to be estimated compared to considering all pairwise correlations. The key assumptions are that the error term for each asset is uncorrelated with the market and uncorrelated across assets. Th

Author

Simon

Language

EN