Assumptions of CAPM
All investors:
- Aim to maximize economic utilities.
- Are rational and risk-averse.
- Are broadly diversified across a range of investments.
- Are price takers, i.e., they cannot influence prices.
- Can lend and borrow unlimited amounts under the risk free rate of interest.
- Trade without transaction or taxation costs.
- Deal with securities that are all highly divisible into small parcels.
- Assume all information is available at the same time to all investors.
Further, the model assumes that standard deviation of past returns is a perfect proxy for the future risk associated with a given security.
Read more about this topic: Capital Asset Pricing Model
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