pp. 223-49.     4. The CAPM market portfolio is a value-weighted portfolio. Each security is held in a proportion equal to its market value divided by the total market value of all securities. 5. If the market portfolio is efficient and the average investor neither borrows nor lends, then the risk premium on the market portfolio is proportional to its variance, 2 , and to the average coefficient of risk aversion across investors, A: - 2 E(rM) rf .01 A M 6. The CAPM implies that the risk premium on any individual asset or portfolio is the product of the risk premium on the market portfolio and the beta coefficient: E(ri) rf i[E(rM) rf] where the beta coefficient is the covariance of the asset with the market portfolio as a fraction of the variance of the market portfolio Cov(ri, rM) i 2 M 7. When risk-free investments are restricted but all other CAPM assumptions hold, then the simple version of the CAPM is replaced by its zero-beta version. Accordingly, the risk-free rate in the expected return-beta relationship is replaced by the zero-beta port- folios expected rate of return: E(ri) E[rZ(M)] iE[rM rZ(M)] 8. The simple version of the CAPM assumes that investors are myopic. When investors are assumed to be concerned with lifetime consumption and bequest plans, but investors tastes and security return distributions are stable over time, the market portfolio remains efficient and the simple version of the expected return-beta relationship holds. 9. Liquidity costs can be incorporated into the CAPM relationship. When there is a large number of assets with any combination of beta and liquidity cost ci, the expected return is bid up to reflect this undesired property according to E(ri) rf i[E(rM) rf] f(ci) III. Equilibrium In Capital Markets 9. The Capital Asset Pricing Model The McGraw−Hill Companies, 2001           286 PART III Equilibrium in Capital Markets     KEY TERMS homogeneous expectations