Chapter 13, Problem 22QP

Summary Introduction

To determine: That the ratios of betas’ are equal to the ratios of risk premiums of the two assets.

Introduction:

Capital asset pricing model (CAPM) is an equation derived from the security market line that attempts to explain the relationship between the risky asset’s expected return and its beta coefficient.

Expected return is the return that the investors expect on a risky investment in the future.