Explanation:
Point III is incorrect. CAPM assumes there are no taxes and no transaction costs.
Points I and II are correct. CAPM assumes that the investors’ time horizon is the same and that, having discounted future cash flows by the same discount rate (expected return), investors reach the same intrinsic price for each stock.
Point IV is correct. Beta risk is the systematic risk, and, under the perfect capital market, investors’ only concern should be a systematic risk as it cannot be eliminated via diversification.
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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
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