Microsoft PowerPoint - PoF.ppt

SMLƒ 61

1st conclusion

ƒ

β

... beta of the asseti

ƒ

... expected excess return of asset i

ƒ

The CAPM says that the

expected excess return of any asset is

proportional to the expected excess return of the market portfolio!

ƒ

Note that the expected return is independent of

σ

, i.p. i

two

assets with the same covariance

with the market portfolio

have the same expected return irrespective of their actual “risk”

!

()

( )

[]

(

)

()

M

M i i F M i F i

r

r

r

Cov

where

r r E r r E

2

,

,

σ

β

β

=

−

=

−

Single-period random cash flows: CAPM

(

)

f

i

r

r

−