Explanation:
Statement III is definitively NOT an assumption of the Capital Asset Pricing Model (CAPM). The standard CAPM assumes a frictionless market, meaning there are strictly NO taxes and NO transaction costs. Statements I and II are valid assumptions of the CAPM framework (investors are rational/risk-averse and share a single-period horizon). Therefore, statement III is the only explicitly false assumption listed.
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Q.23 Which of the following is (are) not (an) assumption(s) of the capital pricing model?
I. Investors require higher returns as a pre-condition for higher risks
II. All investors have the same one-period time horizon
III. CAPM considers taxes but does not consider transaction costs
IV. Investors’ only concern should be a systematic risk
A
II only
B
III only
C
I and IV only
D
III and IV only