ASSET PRICING MODELS (1)• Capital Asset Pricing Model (CAPM)• Testing the CAPM• Implications
ASSUMPTIONS FOR CAPM1. All investors are risk-averse and measure risk in terms of standard deviation of portfolio return (as for the MarkowitzModel).2. All investors have a common time horizon for investment decision-making (eg one month or two years).3. All investors have identical subjective estimates of future returns and risks for all assets.4. There exists a risk-free asset and all investors may borrow or lend unlimited amounts at the risk-free rate.5. All assets are completely divisible, there are no transaction costs or differential taxes, and there are no restrictions on short-selling.6. Information is freely and simultaneously available to all investors.
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