Equilibrium In Capital Markets 10. Single−Index and Multifactor Models The McGraw−Hill Companies, 2001           304 PART III Equilibrium in Capital Markets         CONCEPT C H E C K ☞ QUESTION 4 Can you sort out the nuances of the following maze of models? a. CAPM b. Single-factor model c. Single-index model d. Market model         10.3 THE INDUSTRY VERSION OF THE INDEX MODEL   Not surprisingly, the index model has attracted the attention of practitioners. To the extent that it is approximately valid, it provides a convenient benchmark for security analysis. A modern practitioner using the CAPM, who has neither special information about a se- curity nor insight that is unavailable to the general public, will conclude that the security is "properly" priced. By properly priced, the analyst means that the expected return on the se- curity is commensurate with its risk, and therefore plots on the security market line. For in- stance, if one has no private information about GMs stock, then one should expect   E(rGM) rf GM[E(rM) rf] A portfolio manager who has a forecast for the market index, E(rM), and observes the risk-free T-bill rate, rf, can use the model to determine the benchmark expected return for any stock. The beta coefficient, the market risk, 2 , and the firm-specific risk, 2(e), can be estimated from historical SCLs, that is, from regressions of security excess returns on market index excess returns. There are many sources for such regression results. One widely used source is Research Computer Services Department of Merrill Lynch, which publishes a monthly Security Risk Evaluation book, commonly called the "beta book." The Websites listed at the end of the chapter also provide security betas. Security Risk Evaluation uses the S&P 500 as the proxy for the market portfolio.