Assume That Stock Market Returns Do Follow a Single-Index Structure

question 82

Multiple Choice

Assume that stock market returns do follow a single-index structure. An investment fund analyzes 500 stocks in order to construct a mean-variance efficient portfolio constrained by 500 investments. They will need to calculate ________ estimates of firm-specific variances and ________ estimate/estimates for the variance of the macroeconomic factor.

• A) 500; 1
• B) 500; 500
• C) 124,750; 1
• D) 124,750; 500
• E) 250,000; 500

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Definitions:

Market Shares

A part of the market that is influenced or owned by a particular company or product, usually measured as a percentage of the market's complete sales.

Herfindahl Index

A measure used to assess the level of concentration and competition within an industry, calculated by summing the squares of market shares of all firms in the market.

Concentration Ratio

An economic metric that assesses the market share of the largest firms within an industry to evaluate the market's competitive landscape.

Monopolistically Competitive

Describes a market structure where many firms sell products that are similar but not identical, allowing for differentiation and some degree of market power.