rM) E(rGM) rf 2 M [E(rM) rf] (9.6)   The ratio Cov(rGM,rM)/ 2   measures the contribution of GM stock to the variance of the market portfolio as a fraction of the total variance of the market portfolio. The ratio is called beta and is denoted by . Using this measure, we can restate equation 9.6 as       8 For example, if is 1% (.01 of wealth), then its square is .0001 of wealth, one-hundredth of the original value. The term 2 2 will be smaller than 2 2 by an order of magnitude. III. Equilibrium In Capital Markets 9. The Capital Asset Pricing Model The McGraw−Hill Companies, 2001           CHAPTER 9 The Capital Asset Pricing Model 271     E(rGM) rf GM[E(rM) rf ] (9.7) This expected return-beta relationship is the most familiar expression of the CAPM to practitioners. We will have a lot more to say about the expected return-beta relationship shortly. We see now why the assumptions that made individuals act similarly are so useful. If everyone holds an identical risky portfolio, then everyone will find that the beta of each as- set with the market portfolio equals the assets beta with his or her own risky portfolio. Hence everyone will agree on the appropriate risk premium for each asset. Does the fact that few real-life investors actually hold the market portfolio imply that the CAPM is of no practical importance? Not necessarily. Recall from Chapter 8 that rea- sonably well-diversified portfolios shed firm-specific risk and are left with mostly system- atic or market risk. Even if one does not hold