Topic_10_E2 - Topic 10 Exercise 2 Asset Pricing Models...

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Topic 10 Exercise 2 Asset Pricing Models Relevance of Capital Market Theory An article entitled “Capital Market Theory: Is It Relevant to Practitioners?” was published in the Journal of Financial Planning in October of 1997. The author, David Nawrocki, examines some of the newer theories that have been promoted, as well as the Capital Asset Pricing Model (CAPM). While he concludes that understanding of the CAPM provides some very useful insight, it is not a complete explanation of asset pricing. After reading this article, address the following questions: 1. What assumptions underlie the development of the CAPM? Which assumption does the author suggest as being the most significant deviation from real markets? The assumptions that underlie the CAPM are used so that general equilibrium conditions can be isolated. Without the underlying assumptions, it would not be possible to arrive at the conclusions for the model. The assumptions are: 1. All investors are rational with homogenous expectations and equal investment
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Topic_10_E2 - Topic 10 Exercise 2 Asset Pricing Models...

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