Bodie Marcus INVESTMENTS Fourth Edition Single index model (r1:r)=01+B(rm-rt)+e Risk Premium Market risk premium or Index risk premium ai= the stock's expected return if the markets excess return is zero E(rm-r=0 B (rm-r=the component of return due to movements in the market index e;firm specific component, not due to market movements,E(ei=0 Irwvin/McGrazo-Hill 103 The McGraw-Hill Companies, Inc, 1999Irwin/McGraw-Hill 10-3 © The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus (ri - rf) = i + ßi(rm - rf) + e α i Risk Premium Market Risk Premium or Index Risk Premium i = the stock’s expected return if the market’s excess return is zero ßi(rm - rf) = the component of return due to movements in the market index E(rm - rf) = 0 ei = firm specific component, not due to market movements, E(ei)=0  α Single Index Model Single Index Model