Derivation of CAPM - rigorous approach

[Filip Van de Velde]

Hi everyone,

Where can I find the derivation of formula (10.4)?

Kind Regards,
Filip

 

[David Harper CFA FRM]

Hi @Filip Van de Velde Per my morning routine, I want to help but I don't know exactly to which formula you refer? We (BT) do not have the GARP readings, actually, we have the source texts that constitute the GARP anthology and I think maybe the numbering is different. When you write 10.4 and cite CAPM, I immediately assume Bodie Chapter 10 where 10.4 is: R(p) = α(P) + β(P)*R(M). Is this the formula to which you refer? The P1.T1. assigned R8 (Elton, Gruber, Brown and Goetzmann, Modern Portfolio Theory and Investment Analysis, 9th Edition) is actually a comprehensive theoretical introduction to CAPM (the entire book I mean), although not "casual reading." Let me know? Thanks!

 

[Filip Van de Velde]

Hi David,

Here is the formula:

 

[David Harper CFA FRM]

Hi @Filip Van de Velde Okay that's Elton and he shows the derivation in earlier chapter 6, I extracted the (non trivial) solution here (see Appendix B) http://trtl.bz/elton-ch6-capm-derivation Thanks,