Assume there is a risk free asset Let R denote the vector of risky asset returns, let denote the mean of R , and let denote the covariance matrix of R Let denote a vector of 1s Derive the following formula for the SDF m p from the projection formula (3 32) m p 1 Rf 1 Rf 1 (R ) (3 45) ...

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Assume there is a risk-free asset. Let R denote the vector of risky asset returns, let

Question:

Assume there is a risk-free asset. Let R˜ denote the vector of risky asset returns, let μ denote the mean of R˜ , and let denote the covariance matrix of R˜ . Let ι denote a vector of 1’s. Derive the following formula for the SDF m˜ p from the projection formula (3.32):

m˜ p = 1 Rf

ι − 1 Rf

−1

(R˜ − μ). (3.45)

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