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The following equation is known as the Capital Asset Pricing Model (CAPM) and defines the expected return of an asset i, E(ri), as a function
The following equation is known as the Capital Asset Pricing Model (CAPM) and defines the expected return of an asset i, E(ri), as a function of the risk-free rate, rf, the expected return of the market portfolio, E(TM), and the ratio M = Bi (where Oim denotes the covariance of , o returns of the asset i with the market portfolio, and o stands for the variance of returns of the market portfolio). = OiM E(ri) = rf + (E(rm) rs) OM Prove that the CAPM formula holds true for any combination of assets, and confirm that the beta of the market portfolio, BM, equals to 1. Provide an economic interpretation of your findings
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