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Answer: Expected utility and are not concerned about the tails of return distributions.
## Explanation Under the Capital Asset Pricing Model (CAPM), investors are assumed to: 1. **Maximize expected utility** - CAPM assumes investors are rational and make decisions based on maximizing their expected utility, not just wealth. This incorporates risk preferences through the utility function. 2. **Are not concerned about the tails of return distributions** - CAPM assumes returns are normally distributed, meaning investors only care about mean (expected return) and variance (risk). The model doesn't account for skewness, kurtosis, or tail risk, as it assumes symmetric return distributions. 3. **Single-period framework** - CAPM operates in a single time period context, which is why investors focus on expected utility maximization rather than wealth maximization over multiple periods. Therefore, option D correctly captures both key assumptions of CAPM: expected utility maximization and indifference to tail risk due to the normal distribution assumption.
Author: LeetQuiz .
According to the Capital Asset Pricing Model (CAPM), over a single time period, investors seek to maximize their:
A
Wealth and are concerned about the tails of return distributions.
B
Wealth and are not concerned about the tails of return distributions.
C
Expected utility and are concerned about the tails of return distributions.
D
Expected utility and are not concerned about the tails of return distributions.
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