Question 2 Part II – CAPM: (5 points)
We saw in class that the CAPM relates risk to expected returns for every security in the market, & Risk in CAPM is covariance. Suppose I told you that the relationship between risk and return given by the security market line was linear. That is, for any security x:
Use just this information to derive the CAPM equation/formula. (Hint: Two securities/portfolios that lie on the security market line are the risk-free asset & the market).