BUSF_A01.qxd

Appendix: Derivation of CAPM

or

E(ri) =rf+[E(rm) −rf]β

where β=Cov(i, M)/σ^2 m. This is the CAPM, which says, in effect, that the expected
return from a risky asset depends on the risk-free rate of interest, the expected returns
from the market portfolio, and the degree of correlation between the risky asset’s
returns and those of the market portfolio.