For question 2 (ii), when asked to derive the single index model, is the answer really obvious or did the solution provided skipped all the drama? How did the answer "Ri = (1-ß0).r0 + ßi.Rm + ei" come about, is doesn't look familiar at all. Thanks
Thanks Dukerio May I ask, this Model of returns equation: Ri - ro = ßi (Rm - ro) + ei is really the Security Market Line (SML) equation, when we put the expectation over it, and E[ei]=0, correct? If yes then it all makes sense now. This equation is not shown in the text, is it? Only the expectation one is. I only think that SML applies to any portfolio/security and that Capital Market Line only applies to efficient portfolios. Other than one is re-written with ß, they're both actually similar.
