where R = An asset with price P has random payoff X. CAPM says that COV...

 

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where R = An asset with price P has random payoff X. CAPM says that COV (R, RM) (E[RM] – Rƒ) Var (RM) E[R-Rf] = 1. Show that this implies the following: P = Cov (X, RM) (E [RM] - Rf)] Var (RM) - R₂)] 1 1 + R₂ [E[X]- Rf where P is the price of an asset with random payoff X. where R = An asset with price P has random payoff X. CAPM says that COV (R, RM) (E[RM] – Rƒ) Var (RM) E[R-Rf] = 1. Show that this implies the following: P = Cov (X, RM) (E [RM] - Rf)] Var (RM) - R₂)] 1 1 + R₂ [E[X]- Rf where P is the price of an asset with random payoff X.

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Solution The CAPM states that the expected return on an asset is equal to the riskfree rate plus the ... View the full answer