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Assumptions of Capital Market Theory
  • All investors use mean variance framework and select only those securities which lie on the efficient frontier.
  • Unlimited lending & borrowing possible at the risk free rate.
  • All investors are rational & have identical expectations.
  • There is one period horizon.
  • All assets are infinitely divisible.
  • There are no taxes or transaction costs.
  • There is no inflation.
  • Interest rates will remain constant throughout the holding period.
  • Capital markets are in equilibrium.

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