Let = (r m - r f ) / m be the market risk price

Let θ = (r_m - r_f) / σ_m be the market risk price and θ* = (r_m - r_f) / σ²_m = θ / σ_m, where σ_m is the standard deviation of market portfolio returns. If P_it is the price of stock i at times t = 0, 1, calculate the theoretical price P_io without subtracting the risk from the expected value E(P_i1).

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Pio EPi 1 i m r m Er m Where EPi 1 expected value of s... View the full answer