H12 - Excess Returns and Beta Deriving the Security Market...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Excess Returns and Beta: Deriving the Security Market Line W.L. Silber I. We showed that market forces combined with a search by investors for efficient portfolios would produce the following relationships for each security (i, j = 1 , . .., n ) in a portfolio: (1) m f m i m f i R R X R R s s - = - / This expression can be rewritten as (2) i m m f m f i X R R R R - + = / s s II. Expression (2) says that the equilibrium expected return ( R i ) on security i should equal the risk-free rate ( R f ) plus the market price of risk ( 29 m f m R R s / - times i m X / s . What is i m X / s ? It is the increase in risk ( m s ) associated with a small increase in asset i , in other words, it is the risk contribution of security i to portfolio risk, m s . We can derive i m X / s by taking the derivative of the expression for the variance of a portfolio with respect to X i . The result, as shown in Garbade (p. 175, fn 12) is: (3) ( 29
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/04/2010 for the course ECON 106v taught by Professor Miyakawa during the Spring '08 term at UCLA.

Page1 / 3

H12 - Excess Returns and Beta Deriving the Security Market...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online