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Macro midterm spring

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The central prediction of the consumption CAPM is that premiums that assets offer are proportional to their consumption betas. If, for example, an asset's payoff is highly correlated with consumption, its price must be driven down to the point where its expected return is high for individuals to hold it. Equation 8.5 states that the higher the co variance of an asset's payoff with consumption, the higher its expected return.

Author: Daniel Ortega


CAPM - Asset A has variance of 5, returns are uncorrelated with income. Asset B has a variance of .5, and positively correlated with income. According to CAPM, which asset would an investor prefer?

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