Gianluca Fusai

1 Introduction The capital asset pricing model (CAPM) (Sharpe 1964; Lintner 1965; Mossin 1966) is an easily understandable and straightforward model that explains the relationship between risk and expected return in an efficient market and is widely regarded as the initial and most commonly used asset pricing model. Together with the Markowitz portfolio selection model (Markowitz 1952), it is at the foundation of modern financial theory.

Tweet Facebook LinkedIn Save this article Send to Print this page A new formula for converting a covariance matrix estimated in local currencies into a covariance matrix expressed in a common currency is proposed. This process uses simple matrix multiplications. We solve a long-standing problem in the calculation of risk exposures.