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Christopher Ting
Christopher Ting
http://www.mysmu.edu/faculty/christophert/
k: christopherting@smu.edu.sg
T: 6828 0364
ÿ: LKCSB 5036
2 2
V rw,t = w V ri,t + (1 − w) V rm,t + 2α(1 − α) C ri,t , rm,t .
2
σw = w2 σi2 + 2w(1 − w)σim + (1 − w)2 σm
2
(3)
drw
drw ri − rm
= dw = 2 2
dσw dσw ασi + (1 − 2w)σim − (1 − w)σm
dw σw
2 At w = 0, σw = σm . Moreover, given that the slope is the Sharpe
ratio, we have
rm − rf ri − rm
= 2
σm σim − σm
σm
ri − rm ri − rm
rm − rf = 2
=
σim − σm σim
2 2
− 1
σm σm
Christopher Ting QF 302 Week 6 February 10, 2017 6/7
Slope at w = 0 (Cont’d)
σim
3 For any asset i that is not a market portfolio, 2
− 1 6= 0. So we
σm
multiple it to both sides to obtain
σim
(rm − rf ) 2
− 1 = ri − rm
σm
σim
2
(rm − rf ) − (rm − rf ) = ri − rm
σm
σim
4 Knowing that 2
= βi , we write,
σm
βi (rm − rf ) = (rm − rf ) + ri − rm = ri − rf
5 Hence CAPM ensues:
ri − rf = βi (rm − rf )
q.e.d.
Christopher Ting QF 302 Week 6 February 10, 2017 7/7