d. [8 Points] Assume that we have N risky assets in an economy, indexed by n=1, 2, ..., N. Suppose that in this economy

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D 8 Points Assume That We Have N Risky Assets In An Economy Indexed By N 1 2 N Suppose That In This Economy 1 (311.71 KiB) Viewed 37 times

d. [8 Points] Assume that we have N risky assets in an economy, indexed by n=1, 2, ..., N. Suppose that in this economy CAPM accurately represents the returns for each of the assets. Denote by Mm and oħ the expected excess returns and the variance of the excess returns of the market portfolio. Show that the expected returns and the systematic risk of any portfolio in this economy depends only on its market beta, plus um and om. Show also that, if P is an efficient frontier portfolio with market beta equal to Bp, then P has minimal idiosyncratic risk among all portfolios with market beta equal to Bp.