A model that estimates expected excess return on a security based on the ratio of the firm’s book value to its market value is best described as a:
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A model that estimates a stock’s expected excess return based only on the book-to-market ratio is a single-factor model. The market model is a single-factor model that estimates expected excess return based on a security’s sensitivity to the expected excess return of the market portfolio. A multifactor model would estimate expected excess return based on more than one factor.
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