Answer-first summary for fast verification
Answer: Investors have the same expectations regarding the expected returns and the variance of returns of all assets.
## Explanation Let's examine each option against CAPM assumptions: **A. There are transaction costs associated with buying and selling assets.** - **NOT a CAPM assumption** - CAPM assumes **no transaction costs**. **B. An individual investor can affect the price of a stock by buying or selling that stock.** - **NOT a CAPM assumption** - CAPM assumes **perfect competition** where individual investors cannot affect prices. **C. Investors make their investment decisions by taking into account their personal income taxes.** - **NOT a CAPM assumption** - CAPM assumes **no taxes**. **D. Investors have the same expectations regarding the expected returns and the variance of returns of all assets.** - **CAPM ASSUMPTION** - This is one of the key assumptions of CAPM - homogeneous expectations. Therefore, the correct answer is **D**.
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A risk consultant is advising a pension fund to revise its asset allocation approach to be more consistent with the theory of CAPM. The consultant prepares a list of the assumptions of CAPM to support the advice. Which of the following is an assumption of 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 that stock.
C
Investors make their investment decisions by taking into account their personal income taxes.
D
Investors have the same expectations regarding the expected returns and the variance of returns of all assets.
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