Help with CAPM including [uncertain] inflation

[sleepybird]

David, please help me understanding the following:
“As long as the correlation between the rate of return on the market and the rate of inflation is positive, the market price of risk is higher than that depicted in the standard CAPM.”
èThis I can understand. Inflation increases risk. Standard CAPM ignores inflation (is this correct?), so it understates the risk.
“If an asset’s rate of return is positively correlated with the rate of inflation, the standard CAPM formulation overstates the risk of the asset.”
èThis sentence seems to contradict the above. Shouldn’t it “understate” the risk of the asset?

Please help me understand. Thanks.

 

[David Harper CFA FRM]

Hi sleepybird,

I retreived the referenced paper, here @ http://db.tt/js7i5eld
It's short and straightforward, page 3 seems to show the conclusions. Although I agree with you, I can't currently get from the cited paper to the full set of statements in Elton. And, on the face of it, those statements superficially don't look compatible to me. I bookmarked it for later reference (I don't have time right now to deep dive on it). Thanks, David