Explanation:
The capital asset pricing model (CAPM) assumes the following:
(Book 1, Module 5.2, LO 5.c)
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Question 34
An equity analyst is analyzing a publicly traded firm and is using the company's beta, the risk-free rate of return, and the expected return on the market to estimate the company's required rate of return. He is somewhat concerned that the underlying assumptions of this technique are not realistic. Which of the following statements is an assumption of the capital asset pricing model (CAPM)?
A
Taxes and transaction costs exist.
B
Fractional investments are not possible.
C
Investors make their decisions solely based on expected returns and variances.
D
Market participants can only borrow and lend limited amounts at the risk-free rate.
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