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4-1
Copyright © 2009 by Pearson Education Canada
Chapter 4
Efficient Securities Markets
4-2
Copyright © 2009 by Pearson Education Canada
4.5 Share Price on an Efficient
Market
• CAPM
E(Rjt) = Rf(1 - βj) + βjE(RMt)
Market sets share price so that expected return E(Rjt)
(i.e., firm’s cost of capital) is given by right side of
equation
Note that only firm-specific component is ßj
– How is expected return defined? See Equation
(4.2) in text:
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