suppose that, instead, investors were to invest the increment in GM stock, also financed by borrowing at the risk-free rate. The increase in mean excess return is   E(r) [E(rGM) rf]   This portfolio has a weight of 1.0 in the market, in GM, and in the risk-free asset. Its variance is 12 2 2 2 [2 1 Cov(rGM,rM)]. M GM The increase in variance therefore includes the variance of the incremental position in GM plus twice its covariance with the market:   2 2 2   2 Cov(rGM,rM)   Dropping the negligible term involving 2, the marginal price of risk of GM is   E(r)   E(rGM) rf 2 2Cov(r ,r ) GM M   In equilibrium, the marginal price of risk of GM stock must equal that of the market portfolio. Otherwise, if the marginal price of risk of GM is greater than the markets, in- vestors can increase their portfolio reward for bearing risk by increasing the weight of GM in their portfolio. Until the price of GM stock rises relative to the market, investors will keep buying GM stock. The process will continue until stock prices adjust so that marginal price of risk of GM equals that of the market. The same process, in reverse, will equalize marginal prices of risk when GMs initial marginal price of risk is less than that of the mar- ket portfolio. Equating the marginal price of risk of GMs stock to that of the market results in a relationship between the risk premium of GM and that of the market:   E(rGM) rf 2Cov(rGM, rM)