market that will return rM. The portfolio rate of return will be rM (rM rf). Taking expectations and comparing with the original expected return, E(rM), the incremental expected rate of return will be   E(r) [E(rM) rf]   To measure the impact of the portfolio shift on risk, we compute the new value of the portfolio variance. The new portfolio has a weight of (1 ) in the market and in the risk-free asset. Therefore, the variance of the adjusted portfolio is     7 We open ourselves to ambiguity in using this term, because the market portfolios reward-to-variability ratio   E(rM) rf   M sometimes is referred to as the market price of risk. Note that since the appropriate risk measure of GM is its covariance with the market portfolio (its contribution to the variance of the market portfolio), this risk is measured in percent squared. Accordingly, the price of this risk, [E(rM) rf]/ 2, is defined as the percentage expected return per percent square of variance. III. Equilibrium In Capital Markets 9. The Capital Asset Pricing Model The McGraw−Hill Companies, 2001           270 PART III Equilibrium in Capital Markets     2 (1 )2 2 (1 2 2) 2 2 (2 2) 2 M M M M   However, if is very small, then 2 will be negligible compared to 2 , so we may ignore this term.8 Therefore, the variance of the adjusted portfolio is 2 2 2 , and portfolio variance has increased by     2 2 2   Summarizing these results, the trade-off between the incremental risk premium and incremental risk, referred to as the marginal price of risk, is given by the ratio