what is the one factor model and what is the dif between it with CAMP?

[daniel_ma]

I am confused about one factor model and also confused with regarding the relationship with CAMP model， can someone explain in simple methodology?

thanks

ma chao

 

[Matthew Graves]

I assume you mean the CAPM rather than CAMP!

The term one or single factor model is a generic term where there is (as the name suggests) only 1 determining factor in the model. The CAPM is just a specific example of a single factor model.

 

[tkvfrm]

In generic terms one factor model is using one component or a variable to see the effect of an outcome. To make this clear let us look at most simple return model and graduate to CAPM itself. We will use Ri to denote the expected return from an investment and Rm as the expected market return. In a zero factor model Ri = Rm. In plain English, the expected return is what the market gives. Observe the model is simple straight forward. Also this is not the best model for the reason that the market is not as naive as the model makes it appear. Volatility is the hallmark of any market. So if one factors in volatility it will be more realistic. This means we are including a measure of uncertainty. if one looks closely at the CAPM equation, Rm (minus) Rf (Market return (minus) Risk free return) is the market premium. This will be high if the market is volatile. (Note: I have deliberately left out the beta factor. Let me know if that requires to be explained. Will be happy to do so.) To conclude: The One factor that is used for pricing a capital asset in CAPM model is volatility. Hope this explains.

 

[Nicole Seaman]

@daniel_ma In addition to the response above, here is a thread in the forum discussing this concept: https://forum.bionicturtle.com/posts/9369/. If you type one factor model CAPM into the search function here in the forum, more threads will also come up. Hope this helps!