returns, also known as risk premiums. Unfortunately it is very difficult to measure or infer risk aversions directly. Thus, it is very difficult to estimate the risk premium of any individual asset or of the market. However, note that without knowing anything about risk aversions we can nonetheless infer that the ratio of any two risk premiums is the ratio of their covariances with the market portfolio. In particular, letting \im be the risk premium of the market portfolio we have: Hi _ o,> _2 M* (4-25; and thus M-; =   oi (4.26) or using the conventional notation "beta" for this ratio p = (o /o2) we have that K = P, " M. (4-27) Thus, for each asset its risk premium is given by the asset's beta with the market portfolio times the market risk premium. The beta, being the ratio of a covari-ance to a variance, is easily estimated. In a regression projection of an asset's return on the market return, beta is simply the coefficient on the market return. This then is the fundamental insight of the Capital Asset Pricing Model: In equilibrium the risk premium of an asset is the coefficient of the projection of its return on the market return times the market risk premium. In the next chapter we will review the evidence, weak as it is, on how large the market risk premium ought to be. We will then, in Chapter 6, extend this simple domestic CAPM model to an international setting where currency risk adds a considerable amount of complexity. SUMMARY____________________________________________ We view the CAPM as a framework for thinking about investments. The CAPM asks what happens, in other words what is the nature of equilibrium, in the simplest possible world, where markets are efficient, all investors have identical information, and investors maximize the expected return in their portfolios and minimize their volatility. The optimal portfolio problem is to choose w such that we maximize