tal of 210 estimates (Harrington, 1987, p. 14).
The CAPM takes this simplification even further by using a weighted average as the benchmark for calculating correlation, defining this benchmark as an index of the market-value-weighted portfolio of all possible risky investments. In addition to defining the index as the market portfolio, the CAPM's second adaptation is the additional asset known as the risk-free asset. This risk-free asset has a zero variance and zero covariance with any other asset, which is what renders it risk-free. This is a small but positive return to investors, which is what is required for the temporary illiquidity that goes with the investment.
The CAPM defines risk as the covariability of the security's returns with the market's returns. Risk can also be defined as the volatility of the security's returns relative to the volatility of the market portfolio's returns (Herbst, 1990, p. 299). Investors generally require increased returns from an asset to compensate them for tolerating the risk that the forecasted returns may not
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