Discuss whether the following statement is true or false:
One can always construct a multi-index model that explains more of the returns on a security than a single-index model does.

Question

Quizplus · Accepted Answer

The single-index model assumes that the stock prices move together only because of common movement in the market.Hence,the single index-model derives returns on securities with the help of the market movement in which the securities are being traded.Although,according to many researchers,there are influences beyond the market that cause stocks to move together.The multi-index model includes two different types of schemes that have been put forth for handling additional influences.Hence,the multi-index model takes into consideration the return on securities by introducing additional sources of covariance.By adding these additional influences,the multi-index model explains more of the returns to the general return equation of the single-index model.

Discuss Whether the Following Statement Is True or False