Microsoft PowerPoint - PoF.ppt

SMLƒ 62

2nd conclusion

ƒ ƒ

the variance consists of two parts:-

market - / systematic risk and

• 
  

unique - / unsystematic - / diversifiable - / idiosyncratic risk.

[]

i F M i F i

r

r

r

r

ε

β

+

−

+

=

Single-period random cash flows: CAPM

(

)

(

)

(

)

[

] F M i F i i

r r E r r E E

−

+

=

⇔

=

β

ε

0

(

)

.

.

),

var(

0

,

cov

2

2

2

ei

r

i M i i M i

ε

σ

β

σ

ε

+

=

⇔

=