Explanation

Under the Capital Asset Pricing Model (CAPM), investors are assumed to:

1. Maximize expected utility - CAPM is based on mean-variance optimization where investors care about expected return (mean) and risk (variance), which is a utility-based framework

2. Are NOT concerned about the tails of return distributions - CAPM assumes returns are normally distributed, meaning investors only care about the first two moments (mean and variance) and not higher moments like skewness or kurtosis that characterize tail behavior

This is because CAPM relies on the mean-variance framework where the entire distribution is characterized by just mean and variance, assuming normal distribution of returns.

Key Points:

• CAPM assumes investors are risk-averse and maximize expected utility
• The model assumes returns follow a normal distribution, so investors don't need to worry about tail risk
• This simplification allows for the linear relationship between expected return and systematic risk (beta)