Problem 1 Assume the following market model: rj=j+jFM+j with rj=therateofreturnonassetjj=aconstantj=thesensitivityofassetjtofluctuationsinthemarketreturnTM=themarketrateofreturnj=astochasticcomponentwithE(~j)=0,Var(~j)=j2andcov(~i,~j)=0,i,j. a. Prove that j2=j2M2+zj2. b. Prove that ij=ijM2

Problem I Assume the fol lowing market model with the rate of return on asset j a constant the sensitivity of asset J to fluctuations in the market return the market rate of return a stochastic component with E(ij) O , and a. Prove that = + _ b. Prove that =