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Assumptions of CAPM

  • All assets are infinitely divisible, traded and are collectively held and there always exists a
  • risk-free asset
  • Borrower and lenders are easy to find and they do so at risk-free rate (no counterparty risk)
  • Investors consider only mean and variance to choose a portfolio and Risk-Return distribution follows normal distribution
  • All the investors have similar investment period.
  • Markets are perfect with no tax, transaction cost etc and market participants are price takers, i.e., they cannot influence prices
  • There is no information asymmetry in the market
  • Unlimited short selling is allowed
  • All the assets are marketable including human capital

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