Sources of Systematic Risk in Common Stocks

where Rf is the return from a risk-free asset, E(Rmt) is the expected return from the market, and fli is cov (Ri, Rm)/02(Rm). Thus (conditional on the market return) the expected return from an asset varies directly with its f, which is an index of the asset's systematic or market risk. To calculate ,B, a return-generating process must be specified. The market model2 is generally selected: Rit = ai + FiRmt + lit, (2)