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Answer: Investors have the same expectations regarding expected returns, the variance of returns, and the correlation structure between all pairs of stocks.
CAPM assumes investors have identical expectations with respect to expected returns, the variance of returns, and the correlation matrix representing the correlation structure between all pairs of stocks. The other choices are not assumptions of the CAPM. **Key CAPM Assumptions:** - Investors are rational and risk-averse - Investors have homogeneous expectations - There are no transaction costs or taxes - All assets are perfectly divisible and liquid - Investors can borrow and lend at the risk-free rate - No single investor can influence market prices The other options contradict CAPM assumptions: - **A**: CAPM assumes NO transaction costs - **B**: CAPM assumes NO single investor can affect prices - **C**: CAPM assumes NO taxes **Reference:** Global Association of Risk Professionals. Foundations of Risk Management. New York, NY: Pearson, 2019. Chapter 5. Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM).
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Which of the following is an assumption of the CAPM?
A
There are transaction costs associated with buying and selling assets.
B
An individual investor can affect the price of a stock by buying or selling stocks.
C
Investors should consider their personal income taxes in making investment decisions.
D
Investors have the same expectations regarding expected returns, the variance of returns, and the correlation structure between all pairs of stocks.