Abstract
Abstract:A central paradigm in modern finance theory is the capital asset pricing model (CAPM). While the CAPM is invariably taught in introductory finance courses, a derivation is commonly reserved for postgraduate courses. This is primarily because the available CAPM derivations usually assume an advanced knowledge of pure mathematics. This note provides a simple derivation of the CAPM which requires only an understanding of very basic mathematical concepts. The derivation explicitly highlights the link between the capital market line and the security market line which students often fail to comprehend. Our simple derivation can easily be adopted by instructors at all levels.
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