Hi. I have one question: in a single factor market, is it true that the Covariance of any two securities equals to the variance of the common factor? If so, can you explain why? Thank you very much. Your video was really helpful to me.
What is the difference between the expected return and the required rate of return?According to CAPM when a stock has an E(R) > Required Rate of Return we have to choose that security(Buy) and when it is less we have to sell that stock as it seems to be overestimated. If we find the average return of a stock, is it right then to compare that number with the required rate of return? If E(R) is higher THAN required rate of return does that mean we have to do with a growth stock?? Thank you..
Thanks a lot for the video! It did help a alot to understand everything better. I do have two questions actually: Howcome you get the variance term if j equals i? For the variance term seen in the equation, there is only i but I do not understand how it automatically means that j equals i?
If you take the second term in the equation, the part with 2 summation signs and allow i to equal j, you can get rid of the first term. Say, i=j=2, then you would have w2 times w2, which would be w2 squared times sigma 2 times sigma 2 which is sigma 2 squared (the variance) and the correlation coefficient with itself is one so you get the weight squared times the variance, which is the first term in the equation.
in certain formula for calculating expected return presence of ei has been found. they mentioned it as the unsystematic risk. how come they add that to calculate return. it is further explained as residual return . could you explain what really this error term is.
should these 2 methods deliver the same result? When caculating the s.d. by single index model, it is significantly smaller by using excel function. is it correct?
Thank you for your answer! However I have a follow up question: if that is the case, is it true that when we decide the method we use (single index or markotitz), we should be consistent with it as if we combine these two methods with deliver unmatched results?
The single index model is an approach that simplifies the calculation. You're not going to get the same answer unless you meet all the assumptions of the model. When Sharpe came up with the model, computers were not very powerful. Today, you can probably use the Markowitz model without any problem.
You calculate alpha and beta by running a regression of the returns for the stock (y variable) against the returns for some market index like the S&P 500 (x variable). Once you've calculated the alpha and beta for each stock, you can use the model given in the video.
Exam in less than 3 hrs. This was life saving. Thank you.
Thank you. The phone company example opened my mind to the concept. Thank you
Great explanation! Especially the abstract examples given at the end, really helps concrete the concept, thank you!
You summarized the whole chapter of Index model that I am learning. 👍
Thank you! You do a much better job than my £150 CISI textbook..
i love the intuition part at the end, it was really helpful. Thank you.
Very well explained! Thank you
Hi. I have one question: in a single factor market, is it true that the Covariance of any two securities equals to the variance of the common factor? If so, can you explain why? Thank you very much. Your video was really helpful to me.
No. The idea of the single index model is that you find the covariance between pairs of assets through the index.
What is the difference between the expected return and the required rate of return?According to CAPM when a stock has an E(R) > Required Rate of Return we have to choose that security(Buy) and when it is less we have to sell that stock as it seems to be overestimated. If we find the average return of a stock, is it right then to compare that number with the required rate of return? If E(R) is higher THAN required rate of return does that mean we have to do with a growth stock?? Thank you..
Thank You
It really helped me in understanding it in a much easier way
Thanks a lot for the video! It did help a alot to understand everything better. I do have two questions actually:
Howcome you get the variance term if j equals i?
For the variance term seen in the equation, there is only i but I do not understand how it automatically means that j equals i?
If you take the second term in the equation, the part with 2 summation signs and allow i to equal j, you can get rid of the first term. Say, i=j=2, then you would have w2 times w2, which would be w2 squared times sigma 2 times sigma 2 which is sigma 2 squared (the variance) and the correlation coefficient with itself is one so you get the weight squared times the variance, which is the first term in the equation.
in certain formula for calculating expected return presence of ei has been found. they mentioned it as the unsystematic risk. how come they add that to calculate return. it is further explained as residual return . could you explain what really this error term is.
Awesome video! Thx a lot!
should these 2 methods deliver the same result? When caculating the s.d. by single index model, it is significantly smaller by using excel function. is it correct?
You are not going to get the same answer using these two methods.
Thank you for your answer! However I have a follow up question: if that is the case, is it true that when we decide the method we use (single index or markotitz), we should be consistent with it as if we combine these two methods with deliver unmatched results?
The single index model is an approach that simplifies the calculation. You're not going to get the same answer unless you meet all the assumptions of the model. When Sharpe came up with the model, computers were not very powerful. Today, you can probably use the Markowitz model without any problem.
how do you calculate alpha and beta using share prices ? Would appreciate an answer! Thanks for a great vid
You calculate alpha and beta by running a regression of the returns for the stock (y variable) against the returns for some market index like the S&P 500 (x variable). Once you've calculated the alpha and beta for each stock, you can use the model given in the video.
Thank you!
Excellent
beautiful
thank you so much
How to calculate in excel
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