Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
E rM r f A
2
M
Where
2
• 𝜎𝑀 = variance of the Market portfolio
• 𝐴 = average degree or risk aversion
= 𝐶𝑜𝑣 𝑤𝑖 𝑅𝑖 , 𝑅𝐺𝐸
𝑖=1
• Therefore, the reward-to-risk ratio for investments
𝐺𝐸 ′ 𝑠 𝑐𝑜𝑛𝑡𝑟𝑖𝑏.𝑡𝑜 𝑟𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚
in GE would be = 𝐺𝐸′𝑠 𝑐𝑜𝑛𝑡𝑟𝑖𝑏.𝑡𝑜 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 =
𝑤𝐺𝐸 𝐸 𝑅𝐺𝐸 𝐸 𝑟𝐺𝐸 − 𝑟𝑓
= =
𝑤𝐺𝐸 𝐶𝑜𝑣 𝑅𝐺𝐸 , 𝑅𝑀 𝐶𝑜𝑣 𝑅𝐺𝐸 , 𝑅𝑀
INVESTMENTS | BODIE, KANE, MARCUS 9-9
GE Example
• Reward-to-risk ratio for investment in market
portfolio:
Market risk premium E (rM ) rf
Market variance M2
• At equilibrium all reward-to-risk ratios are
equal, including that of GE:
E rGE r f E rM r f
Cov rGE , rM
2
M
COV R GE , R M
E rGE r f E r r
2 M f
M
• Restating, we obtain:
E rGE r f GE E rM r f