Investments Concepts and Applications

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Chapter 9—Alternative risky asset pricing models

TRUE/FALSE

1. The CCAPM assumes that a functioning capital market exists that allows investors to achieve their
desired level of personal consumption.

ANS: T
That is, investors make investment choices that allow them to alter their timing of when they
consume, so as to maximise the utility of consumption in the long run.

PTS: 2 DIF: Easy REF: 9.2 Consumption CAPM (CCAPM)

2. According to the CCAPM, if the expected return on the market return is 7% and the risk-free rate
is 5%, the expected return on a portfolio with a consumption beta of 1.5 is 3.1%.

ANS: T
Similarly to the CAPM, we can calculate the return on a portfolio using the consumption beta. E(R)
= 0.05 + 1.5(0.07 – 0.05) = 0.031 = 3.1%.

PTS: 1 DIF: Easy REF: 9.2.3 Empirical performance

3. According to the CCAPM, if the expected return on the market return is 6% and the risk-free rate
is 4.5%, the consumption beta of a portfolio with 6% is 3.0.

ANS: F
Rearranging the CAPM equation, we can find the beta of the portfolio:
0.06 = 0.045 + (0.06 – 0.045), hence  = 0.015/0.015 = 1

PTS: 2 DIF: Moderate REF: 9.2.3 Empirical performance

4. The possibility of arbitrage arises when there is no consensus among investors regarding the
future direction of the market, and thus trades are made arbitrarily.

ANS: F
The possibility of arbitrage arises when mispricing among securities creates opportunities for
riskless profits.

PTS: 2 DIF: Moderate REF: 9.3.1 Arbitrage profits

5. The APT of Ross requires the assumption of quadratic utility.

ANS: F
Ross’s original model did not require the assumptions of either quadratic preference functions or
normally distributed returns, and it did not require identification of the market portfolio of assets
that are necessary for the CAPM.

PTS: 3 DIF: Difficult REF: 9.3.2 The Ross model

6. In a study of the Australian equity market, Faff (1988) identifies up to three priced factors.

ANS: T
 Priced factors are observed in the USA and around five factors seem necessary for pricing. Faff
(1988, 1992) also identifies a small number of factors in Australian equity returns. Using data from
the period 1974–85, Faff (1988) identifies up to three priced factors. In a later paper, the sample
period is increased to include observations up to September 1987, and improved econometric
techniques are applied. In this test, Faff (1992) observes that a five-factor APT model outperforms
a 10-factor APT model and the CAPM.

PTS: 3 DIF: Difficult REF: 9.3.4.1 Tests based on unobservable factors

7. The cross-sectional regression technique of Fama and Macbeth (1973) is used in the Asset Pricing
field to estimate risk premiums.

ANS: T
The cross-sectional regression technique of Fama and MacBeth (1973) is used in the asset pricing
field to estimate risk premiums. Companies are grouped in 20 portfolios sorted by size to reduce
the effect of measurement errors. Five years of data are used to estimate the sensitivity of the
monthly returns to the unexpected changes in economic variables. The sensitivities are then
regressed against returns in cross-section regressions, one regression for each month in the year.
The 12 cross-sectional regressions in each year provide 12 sets of risk premium estimates, which
are grouped together year by year to create a time-series of risk premium estimates for the full
sample period.

PTS: 3 DIF: Difficult REF: 9.3.4.2 Tests based on arbitrarily selected

observable factors

8. The findings of Jegadeesh and Titman (1993) when looking at stocks in the USA in relation to
findings about very strong prior positive or negative performance confer that a profitable
momentum strategy appears viable and can be assessed by assuming a long position in the winner
portfolio and a short position in the loser portfolio.

ANS: T
It is true, as stated above. Stock returns appear to exhibit momentum whereby the path of prior
returns influences future direction.
PTS: 1 DIF: Moderate REF: 9.4.3 Carhart’s extension

9. The dividend discount model is often used for the purpose of identifying factors in the
international CAPM.

ANS: F
In a globally integrated market, it is international market forces that are systematic. However, this
model suffers from similar criticisms as the CAPM, in that the global market portfolio can never
be identified.

PTS: 3 DIF: Difficult REF: 9.5.3 The CAPM or the ICAPM?

10. The international CAPM avoids the critique regarding the identification of the market portfolio, as
raised by Roll (1977).

ANS: F
In a globally integrated market, it is international market forces that are systematic. However, this
model suffers from similar criticisms as the CAPM, in that the global market portfolio can never
be identified.

PTS: 2 DIF: Moderate REF: 9.5.3 The CAPM or the ICAPM?

MULTIPLE CHOICE

1. Which of the following is an issue associated with the calculation of consumption for practical
application in the CCAPM?
A. Goods are consumed immediately
B. Consumption figures are constant and relied on fro decisions
C. Expenditure is reported rather than consumption
D. all of these choices
ANS: C
From a practical perspective, there are a number of difficulties associated with applying the
CCAPM. First, the CCAPM requires a measure of aggregate consumption per capita. This data is
generally not available, and hence some proxy must be used. Ideally we want to measure the actual
value of consumption; however, consumption statistics tend to be expenditures. This implies that
goods are consumed immediately following their purchase, which of course is not true. Further, in
order to implement the CCAPM, we require consumption levels at particular points in time.
However, reported expenditure figures are for expenditure over a period rather than at a fixed point.
A final issue relates to the accuracy of the consumption data. Consumption data inevitably
provided in aggregate do not span the entire universe of consumption transactions, and are
therefore measured with error.

PTS: 2 DIF: Moderate REF: 9.2.1 Derivation of the CCAPM

2. The arbitrage pricing theory was developed by _________.

A. Henry Markowitz
B. Stephen Ross
C. William Sharpe
D. Eugene Fama
ANS: B
The Apt was developed by Ross (1976) at a time when there was growing questioning aver the
validity of the CAPM

PTS: 2 DIF: Easy REF: 9.3 The Arbitrage Pricing Theory (APT)

3. The most significant conceptual difference between the arbitrage pricing theory (APT) and the
capital asset pricing model (CAPM) is that the CAPM _____________.
A. places less emphasis on market risk
B. recognizes multiple unsystematic risk factors
C. recognizes only one systematic risk factor
D. recognizes multiple systematic risk factors

ANS: C

PTS: 2 DIF: Moderate REF: 9.3 The Arbitrage Pricing Theory (APT)

4. Calculate the consumption beta for an asset with a variance of 10%, where the variance of
consumption growth is 15% and the covariance between the growth rate in consumption and the
asset is 20%.
A. 0.15
B. 1.00
C. 1.25
D. 1.33
 ANS: D
Using equation 9.1, we can compute the beta as follows: 0.2/0.15 = 1.33.

PTS: 3 DIF: Difficult REF: 9.2.1 Derivation of the CCAPM

5. An asset in the Australian market has a consumption beta of 3.0. If the variance of the asset is 20%
and the variance of the growth rate in consumption is 12.5%, what is the asset’s covariance with
the growth rate in consumption?
A. 45%
B. 37.5%
C. 15%
D. 60%
ANS: B
Rearranging equation 9.1, and using the inputs provided, we can compute the covariance of the
asset with the growth rate in consumption to be 3 ´ 0.125 = 0.375.

PTS: 3 DIF: Difficult REF: 9.2.1 Derivation of the CCAPM

Factor 1 Factor 2 Factor 3 Factor 4

Risk premium 3.8% 4.4% 5.7% 5.9%
Asset sensitivity –1.2 -1.6 1.9 0.6

6. Given the factors pricing assets above and a risk-free rate of return of 6%, what is the expected
return of the asset using the APT?
A. 2.49%
B. 2.76%
C. 3.13%
D. 8.77%
ANS: D
Utilising equation 9.3, we can calculate the asset’s expected return as follows, 0.06 + (0.038
´ –1.2) + (0.044 ´ -1.6) + (0.057 ´ 1.9) + (0.059 ´ 0.6) = 0.0877 or 8.77%.

PTS: 2 DIF: Moderate REF: 9.3.2 The Ross model

7. One of the main problems with the arbitrage pricing theory is __________.
A. its use of several factors instead of a single market index to explain the risk-return
relationship
B. the introduction of nonsystematic risk as a key factor in the risk-return relationship
C. that the APT requires an even larger number of unrealistic assumptions than does the
CAPM
D. the model fails to identify the key macroeconomic variables in the risk-return relationship
ANS: D

PTS: 2 DIF: Moderate REF: 9.3.3 Problems with the APT

8. According to the Faff studies in 1992, which of the following models dominates in describing
equity returns in the Australian market?
A. the CAPM
B. a three-factor APT model
C. a ten-factor APT model
D. none of the above
 ANS: D
Priced factors are observed in the USA, and around five factors seem necessary for pricing. Faff
(1988, 1992) also identifies a small number of factors in Australian equity returns. Using data from
the period 1974–85, Faff (1988) identifies up to three priced factors. In a later paper, the sample
period is increased to include observations up to September 1987 and improved econometric
techniques are applied. In this test Faff (1992) observes that a five-factor APT model outperforms
a 10-factor APT model and the CAPM.

PTS: 3 DIF: Difficult REF: 9.3.4.1 Tests based on unobservable factors

9. Which of the following factors did Chen, Roll and Ross (1986) include in their APT model?
A. yearly growth in industrial production
B. change in expected inflation
C. Interest rate structures
D. all of the above
ANS: B
Chen, Roll and Ross (1986) note the difficulty with identifying factors, and select observable
variables that are expected to drive prices. Their research focuses on the ability of macroeconomic
variables to explain changes in share prices. Chen, Roll and Ross test for a variety of variables – a
set of which is provided in table 9.2, This table includes monthly growth in industrial production,
change in expected inflation, unexpected inflation, return on a value-weighted portfolio of New
York Stock Exchange and a risk premium.

PTS: 2 DIF: Moderate REF: 9.3.4.2 Tests based on arbitrarily selected

observable factors

10. The three factors that appear to be most relevant when testing the APT relate to:
A. unexpected interest rates, inflation and economic growth
B. expected interest rates, inflation and economic growth
C. expected and unexpected interest rates and economic growth
D. expected and unexpected interest rates and inflation
ANS: A
Despite a large volume of work, there is no clear consensus as to which particular variables are
relevant pricing factors. For instance, Cho, Eun and Senbet (1986) test the APT at the international
level for 11 industrial economies and report between one and five factors. However, in the main,
variables related to (unexpected) interest rate structures, inflation and economic growth appear to
be relevant most frequently.

PTS: 2 DIF: Moderate REF: 9.3.4.2 Tests based on arbitrarily selected

observable factors

11. Which of the following is NOT a factor used by Chen, Roll and Ross (1986) in their empirical test
of the APT?
A. industrial production
B. expected inflation
C. oil prices
D. unanticipated change in the term structure
ANS: C
 Chen, Roll and Ross (1986) note the difficulty with identifying factors and select observable
variables that are expected to drive prices. Their research focuses on the ability of macroeconomic
variables to explain changes in share prices. Chen, Roll and Ross test for a variety of variables—a
set of which is provided in table 9.2, page 291. This table includes monthly growth in industrial
production, change in expected inflation, unexpected inflation, return on a value-weighted
portfolio of New York Stock Exchange, unanticipated changes in the term structure and a risk
premium.

PTS: 3 DIF: Difficult REF: 9.3.4.2 Tests based on arbitrarily selected

observable factors

12. Which of the following is NOT a risk premium incorporated in the Fama and French (1992)
three-factor model of expected returns?
A. consumption premium
B. market premium
C. size premium
D. growth vs. value premium
ANS: A
Fama and French (1993, 1996) take a different approach to that followed by Chen, Roll and Ross
(1986). They use variables ‘that have no special standing in asset-pricing theory [but that] show
reliable power to explain the cross-section of average returns’. That is, they rely upon prior
research, which has shown there are some variables that for whatever reason appear relevant. The
variables chosen in the analysis include size and book-to-market value for equities and term
premium and default premium for bonds.

PTS: 3 DIF: Difficult REF: 9.4 Fama and French three-factor model

13. A major difference between the application of the ICAPM compared with the domestic CAPM is:
A. estimation of beta
B. no uniform risk-free rate
C. identification of market portfolio
D. all of the above
ANS: B
A number of complications arise when attempting to model in an international context. First, no
uniform risk-free rate exists for all markets. Second, the existence of exchange rates results in an
additional risk for investors, the effect of which needs to be included in the model. Exchange rate
risk means that investors in different countries will perceive the risk and return characteristics of
foreign investments differently.

PTS: 2 DIF: Moderate REF: 9.5.1 Development of the ICAPM

14. If the ICAPM beta is 0.8, and the world market return and risk-free rate are 12% and 5%
respectively, then the expected return predicted by the ICAPM is:
A. 6.0%
B. 8.8%
C. 10.6%
D. 12.4%
ANS: C
Using equation 9.10, and the inputs provided, we can compute the expected return as follows: 0.05
+ 0.8 (0.12 – 0.05) = 0.106 or 10.6%.

PTS: 2 DIF: Moderate REF: 9.5.1 Development of the ICAPM

15. If the All-Ordinaries has a beta with respect to the world market of 1.2, and the world market
return and risk-free rate are 12% and 6% respectively, then the expected return predicted by the
ICAPM for Australia is:
A. 8.8%
B. 10.6%
C. 12.8%
D. 13.2%
ANS: D
Using equation 9.10, we can compute the expected return for Australia as follows, 0.06 + 1.2
(0.12 – 0.06) = 0.132 or 13.2%.

PTS: 2 DIF: Moderate REF: 9.5.1 Development of the ICAPM

16. The ICAPM has been extended to a two-factor version by Adler and Dumas (1983) that
incorporates what additional type of risk?
A. oil price risk
B. exchange rate risk
C. consumption risk
D. inflation risk
ANS: B
Adler and Dumas (1983) provide a framework for the international pricing of securities
incorporating the different consumption preferences of individuals across national markets. The
model consists of two sources of risk. The first is the world market risk, akin to that in Solnik’s
model, while the second is for exchange rate risk.

PTS: 3 DIF: Difficult REF: 9.5.1 Development of the ICAPM

17. The international capital asset pricing model (ICAPM) assumes:

A. no investment restrictions
B. a completely integrated global financial market
C. a completely segmented global financial market
D. a completely integrated global financial market with no investment restrictions
ANS: D
The international capital asset pricing model (ICAPM) prices assets as if there are no national or
political boundaries. This model assumes a completely integrated global financial market in which
there are no barriers to capital flows and no investment restrictions.

PTS: 2 DIF: Moderate REF: 9.5 International asset pricing models

18. Using Solnik’s (1974) ICAPM, what is the expected return on an Australian security with a world
market beta of 0.78 if the Australian risk-free rate is 5.37%, the world risk-free rate is 1.7% and the
expected return on the world market portfolio is 13.19%?
A. 7.80%
B. 10.66%
C. 11.47%
D. 14.33%
ANS: D
Using equation 9.10, we can calculate the expected return on an Australian security in the
following way: E(Ri) = 0.0537 + 0.78(0.1319 – 0.017) = 0.1433 or 14.33%.
 PTS: 2 DIF: Moderate REF: 9.5.1 Development of the ICAPM

19. Considering the CAPM in an international context leads to further complications on top of those
associated with the local CAPM. These include:
A. foreign exchange rates
B. finding an appropriate market portfolio
C. finding a uniform risk-free rate
D. all of the above
ANS: A
A number of complications arise when attempting to model in an international context. First, no
uniform risk-free rate exists for all markets. Second, the existence of exchange rates results in an
additional risk for investors, the effect of which needs to be included in the model. Exchange rate
risk means that investors in different countries will perceive the risk and return characteristics of
foreign investments differently.

PTS: 2 DIF: Moderate REF: 9.5.1 Development of the ICAPM

Factor [E(RM) – RF) SMB HML

Sensitivity bi = 0.60 si = –0.44 hi = 0.28
Risk premium 12.7% -2.17% 3.25%

20. Assume the Fama–French model is the correct model to price assets. If an asset has the above
sensitivities and the risk-free rate is 5%, what is the asset’s expected return?
A. 16.1%
B. 15.2%
C. 14.5%
D. 20.5.%
ANS: C
Using equation 9.8, which can be expressed as E(Ri) = Rf + i[(Rm) – Rf] + siE(SMB) + hiE(HML),
the expected return can be calculated as E(R) = 0.05 +0.60(0.127) – 0.44(–0.0217) + 0.28(0.0325)
= 0.1448 or 14.5%.

PTS: 2 DIF: Moderate REF: 9.4.1 Model development

21. Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of 13%.
Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate of return is 10%. If
you wanted to take advantage of an arbitrage opportunity, you should take a short position in
portfolio __________ and a long position in portfolio _________.
A. A; A
B. A; B
C. B; A
D. B; B

ANS: C

PTS: 2 DIF: Moderate REF: 9.3.1 Arbitrage profits

22. An asset has the above sensitivity to the market portfolio and the risk-free rate is 6%. If an investor
uses the CAPM model, but the Fama–French model is the correct model, by how much is the
asset’s expected return differ?
A. 1.2%
B. 0.9%
C. 3.1%
D. 4.5.%
ANS: B
Using equation 9.8, which can be expressed as E(Ri) = Rf + i[(Rm) – Rf] + siE(SMB) + hiE(HML),
the expected return can be calculated as E(R) = 0.06 + 0.60(0.127) – 0.44(–0.0217) + 0.28(0.0325)
= 0.1448 or 14.5%. Hence, the Fama–French expected return is 14.5%. Using the CAPM (see the
case study on page 283), which can be expressed as E(Ri) = Rf + i[(Rm) – Rf], the expected return
can be calculated as E(R) = 0.06 +0.60(0.127) = 0.136 or 13.6%. Therefore, the CAPM understates
the true expected return by 0.145 – 0.136 = 0.009 or 0.9%.

PTS: 2 DIF: Moderate REF: 9.4.1 Model development

Factor [E(RM) – RF) SMB HML

Sensitivity bi = 1.75 si = –0.80 hi = 0.60
Risk premium 18.5% 5.25% 0.50%

23. Suppose the above asset is observed in the market trading with an expected return of 18%. What
strategy would you suggest to profit from this situation, assuming the CAPM was the correct
pricing model and the risk-free rate was 8%?
A. buy the asset
B. short-sell the asset
C. buy the risk-free asset
D. sell the market portfolio
ANS: B
The CAPM (see the case study on page 277) can be expressed as E(Ri) = Rf + i[(Rm) – Rf], and
hence the expected return for the asset can be calculated as E(R) = 0.08 + 1.75(0.12) = 0.29 or
29.0%. If the asset was observed in the market to be trading with a return of 28%, then the market
is out of equilibrium. The correct strategy would be to short-sell the asset, as it has a return lower
than expected by the CAPM model. That is, the price of the asset is too high (i.e. the return is to
low), and hence the investor can then profit from the expected future fall in price as the market
moves back into equilibrium.

PTS: 2 DIF: Moderate REF: 9.2.3 Empirical performance

24. Suppose the above asset is observed in the market trading with an expected return of 28%. What
strategy would you suggest to profit from this situation, assuming the Fama–French model was the
correct pricing model and the risk-free rate was 8%?
A. buy the asset
B. short-sell the asset
C. buy the risk-free asset
D. sell the market portfolio
ANS: A
 Using equation 9.8, which can be expressed as E(Ri) = Rf + i[(Rm) – Rf] + siE(SMB) + hiE(HML),
the expected return can be calculated as E(R) = 0.08 + 1.75(0.185) – 0.80(0.0525) + 0.60(0.005) =
0.251 or 25.1%. If the asset is observed in the market to be trading with a return of 28%, then the
market is out of equilibrium. The correct strategy would be to buy the asset, as it has a return that
is higher than expected by the Fama–French model. That is, the price of the asset is too low (i.e.
the return is too high), and hence the investor can then profit from the expected future rise in price
as the market moves back into equilibrium.

PTS: 2 DIF: Moderate REF: 9.2.3 Empirical performance, 9.4.1 Model

development

25. Marion and Birkan (i.e. M and B) are aspiring young investment students. During the lecture on
asset pricing, both were inspired by the beauty of the models presented. M found the CAPM model
overly simplistic and favoured the Fama–French model, while B disagreed, and instead believed
that the CAPM, being more theoretical, was the better model. As part of a class assignment, they
were each given the tabled information regarding an asset and asked to recommend a trading
strategy based upon their preferred asset pricing model. If the asset is observed in the market
trading with an expected return of 28%, and the risk-free rate is 8%, what are the relative trading
strategy recommendations of each investor?
A. Both M and B will recommend buying the asset
B. Both M and B will recommend short-selling the asset
C. M will recommend buying the asset, while B will recommend short-selling the asset
D. B will recommend buying the asset, while M will recommend short-selling the asset
ANS: C
Birkan (B) favours the CAPM: The CAPM (see the case study CCAPM Estimate for BHP Billiton)
can be expressed as E(Ri) = Rf + i[(Rm) – Rf], and hence the expected return for the asset can be
calculated as E(R) = 0.08 + 1.75(0.12) = 0.29 or 29.0%. If the asset were observed in the market to
be trading with a return of 28%, then the market is out of equilibrium. Therefore, B’s
recommendation, based on the CAPM, is that the asset’s return is too low, and hence the asset
should be short-sold.

Marion (M) favours the Fama–French model: Using equation 9.8, which can be expressed as E(Ri)
= Rf + i[(Rm) – Rf] + siE(SMB) + hiE(HML), the expected return can be calculated as E(R) = 0.08
+ 1.75(0.185) – 0.80(0.0525) + 0.60(0.005) = 0.251 or 25.1%. According to the Fama–French
model, the asset’s return is too high, and hence the correct strategy would be to buy the asset.

To summarise, M will recommend buying the asset, while B will recommend short-selling the
asset.

PTS: 3 DIF: Difficult REF: 9.2.3 Empirical performance, 9.4.1 Model

development

26. An arbitrage portfolio exists, including an asset A with a total market value of $60 000 and 100
other assets with a combined market value of $850 000. Assume that asset A is mispriced, with a
pricing error of 17%, while the remainder of the assets are priced correctly according to the factor
structure. What is the arbitrage portfolio pricing error?
A. 1.1%
B. 94.5%
C. 1.1%
D. 11.2%
ANS: C
 Following example 9.5, the arbitrage pricing error can be found according to: (60000/910000) 0.17
+ (850000/910000)0.00 = 0.011 or 1.1%.

PTS: 2 DIF: Moderate REF: 9.3.4.1 Tests based on unobservable factors

27. Using Solnik’s (1974) ICAPM, what is the expected return on an Australian security with a world
market beta of 1.2 if the Australian risk-free rate is 7%, the world risk-free rate is 3.5% and the
expected return on the world market portfolio is 22%?
A. 23.0%
B. 25.2%
C. 25.7%
D. 29.2%
ANS: D
Using equation 9.10, the expected return from the ICAPM is E(Ri) = 0.07 + 1.2(0.22 – 0.035) =
0.292 or 29.2%.

PTS: 2 DIF: Moderate REF: 9.5.1 Development of the ICAPM

28. Calculate the consumption beta for an asset with a standard deviation of 10%, where the variance
of consumption growth is 10% and the covariance between the growth rate in consumption and the
asset is 0.015.
A. 0.15
B. 0.50
C. 0.75
D. 1.50
ANS: D
The consumption beta is defined as the covariance of the asset with the growth rate of consumption
divided by the variance of the growth rate in consumption. That is; 0.015/(0.1)2 = 0.015/0.01 =
1.50.

PTS: 3 DIF: Difficult REF: 9.2.1 Derivation of the CCAPM

29. An asset in the Australian market has a consumption beta of 0.5. If the variance of the asset is
0.024 and the variance of the growth rate in consumption is 0.035, what is the asset’s covariance
with the growth rate in consumption?
A. 0.0010
B. 0.0120
C. 0.0175
D. 2.0830
ANS: C
The consumption beta is defined as the covariance of the asset with the growth rate of consumption
divided by the variance of the growth rate in consumption. In this case, we can solve for the
covariance by multiplying the consumption beta (0.5) by the variance of the growth rate in
consumption (0.035) to give an answer of 0.0175.

PTS: 2 DIF: Moderate REF: 9.2.1 Derivation of the CCAPM

30. Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta
of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively.
The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage
opportunities exist.
A. 13.5%
B. 15%
C. 16.25%
D. 23%

ANS: C
Using the equation 9.4 the basic pricing relationship of the APT
E(rA) = 7 + 0.5(1) + 1.25(7) = 16.25%

PTS: 2 DIF: Moderate REF: 9.2.1 Derivation of the CCAPM

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