Single-index model

Imagine you have a bunch of toys that you like to play with. Each toy makes you happy or unhappy depending on how much you like it. But it's hard to keep track of how much you like each toy and how happy it makes you.

Now imagine you have a special toy that is like a magic key to all your other toys. This magic key toy is called the "index toy". This toy can measure how happy or unhappy you are with all your other toys, just by playing with it.

The single-index model is like that magic index toy. It's a special tool that helps people who invest in the stock market keep track of how well their investments are doing overall.

The index toy represents the stock market as a whole. By playing with the index toy, they can predict how their individual investments are going to perform based on how well the whole stock market is doing.

So just like you can use the magic index toy to measure how much you like your other toys, investors use the single-index model to measure how well all their investments are doing, and how the stock market is likely to perform.