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Problem 1: <strong>CAPM</strong>• beta is proportionality factorE(ri| Ωt) − rfβi=E(r | Ω ) − rm– Excess returns for security over riskless return isproportional to excess returns in market overriskless returns– Excess is extra return to compensate for risk for notholding the market portfolio• Premium on security is proportional to premium onthe market portfoliotfPage 4
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