Chapter 08 – Index Models
8-1
CHAPTER EIGHT
INDEX MODELS
CHAPTER OVERVIEW
The single-factor index model is introduced; this model predicts stock returns based upon both the firm
LEARNING OBJECTIVES
Upon completion of this chapter the student should have a full understanding of systematic and firm-
PRESENTATION OF MATERIAL
8.1 A Single-Factor Security Market
8.2 The Single-Index Model
8.3 Estimating the Single-Index Model
Estimating the single index model is demonstrated in detail using Hewlett-Packard. Complete regression
analysis and a plot of the characteristic line are presented. A sample regression output is displayed in
Table 8.1 and excess returns are presented in Figure 8.2.
8.4 Portfolio Construction and the Single-Index Model
Table 8.2 displays the differences for the selected securities for both the minimum variance portfolios and
8.5 Practical Aspects of Portfolio Management with the Index Model
Consideration of the differences between the industry version of the single-index model and the single