What assumptions must be made in deriving the Capital Asset Pricing Model (CAPM)?

Advanced Financial Management Block Revision Mock Exams

Assumptions of CAPM
– There is a single risk-free rate of return
– An accurate statistical estimate can be made of the beta factor of a company‚Äüs shares.
– Single period investment horizon
– Perfect market (no personal taxes)
– Homogeneous expectations of investors
– Investors hold well diversified portfolios
– Inflation and its effect on dividends and capital gains can be ignored
– Returns are measured as both dividends and capital gains
– Efficient market (free flow of information)

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