The equation for the single-index market model is A) RFR_it = a_i + bR_mt + e_t. B) R_it = a_i + bR_mt + e_t. C) R_it = a_i + bRFR_t + e_t. D) R_mt = a_i + bR_it + e_t. E) R_it = a_i + b(R_mt - RFR_t) + e_t.

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Quizplus · Accepted Answer

The single-index market model equation is represented as R_it = a_i + bR_mt + e_t. This equation explains the relationship between an asset's return and the return of the overall market. The asset's return is represented by R_it, while the market return is represented by R_mt. The coefficient "a" represents the asset's sensitivity to the market and "b" represents the market risk premium. Therefore, the best choice is B, which represents the single-index model equation correctly.

The Equation for the Single-Index Market Model Is