1
Q
What is the Capital Asset Pricing model (CAPM)?
A
This gives the relationship between the risk of an asset and its expected return
2
Q
What is the first assumption of the CAPM?
A
Individual behavior
1. Investors are rational, mean-variance optimizers
2. Investors have a common investment horizon
3. Investors all use identical input list and have homogeneous expectations
3
Q
What is the second assumption of the CAPM?
A
Market structure, perfect markets, perfect competition
1. All assets are publicly held and trade on public exchanges
2. Investors can borrow and lend at a common risk-free rate
3. No taxes
4. No transaction costs
4
Q
What are the implications of CAPM?
A
- If CAPM is true then holding the market portfolio is efficient
- Any project/investment can be considerred an asset
5
Q
What are the Criticisms of CAPM?
A
- Assumptions are very restrictive
- What is the market portfolio?
