I started in on some BKM 8 questions and one asked for the Covar between two assets. I was stumped because I "recalled" that in CAPM our beta is Covar(A,M)/Var(M), so I thought I could get Covar(A,M) and Covar(B,M) but had no clue how to get Covar(A,B). As it turns out, this was a single index model question, where somehow Covar(A,B) is product of the betas x var(m). Also, they note that the variance of (A) is beta^2 x var(m)^2. So, what it seems like is the beta from the single index model setup is the root of the beta in the CAPM.
The issue is I find these two scenarios fairly similar and the authors don't really give any derivation to explain what the deal is. Is this a case of "Accept the betas are not the same and move on" or is there a quick explanation anyone has?
The issue is I find these two scenarios fairly similar and the authors don't really give any derivation to explain what the deal is. Is this a case of "Accept the betas are not the same and move on" or is there a quick explanation anyone has?
Beta - Single Index vs CAPM
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