derive a formula that looks like CAPM from linear pricing. Assume there exists a pricing kernel...

 

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derive a formula that looks like CAPM from linear pricing. Assume there exists a pricing kernel op so that fo=ffrodP = E[f4]. (a) Let R denote the total return of asset i from time 0 to T, and let R = (1 + r) denote the total return on the risk free asset. What is E[p] in terms of the risk free rate R? (b) Derive a formula for E[R] - R, in terms of a covariance with the pricing kernel. (c) From this, derive bounds for the Sharpe ratio of any asset in the market. (d) Let R* be an asset that achieves the Sharpe ratio upper-bound, then how must it be related to the pricing kernel? (e) Using R*, eliminate p from the formula for E[R] - Rf and write it in a form that looks like CAPM. (f) If this were actually CAPM, how would the market portfolio relate to q? derive a formula that looks like CAPM from linear pricing. Assume there exists a pricing kernel op so that fo=ffrodP = E[f4]. (a) Let R denote the total return of asset i from time 0 to T, and let R = (1 + r) denote the total return on the risk free asset. What is E[p] in terms of the risk free rate R? (b) Derive a formula for E[R] - R, in terms of a covariance with the pricing kernel. (c) From this, derive bounds for the Sharpe ratio of any asset in the market. (d) Let R* be an asset that achieves the Sharpe ratio upper-bound, then how must it be related to the pricing kernel? (e) Using R*, eliminate p from the formula for E[R] - Rf and write it in a form that looks like CAPM. (f) If this were actually CAPM, how would the market portfolio relate to q?

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a Assuming that the pricing kernel is op we have EopRi EopERiop Since op is assumed to be the pricin... View the full answer