CAPM assumes that investors have a short period investment horizon.

B is incorrect. CAPM assumes that investors have homogenous expectations. It assumes that investors hold the same mean-variance efficient (MVE) portfolio and is the market portfolio.

C is incorrect. CAPM assumes that investors trade without transaction costs and that returns are not affected by taxes.

D is incorrect. The CAPM assumes investors can access all information at the same time. According to the model, different information means no common efficient frontier line can be drawn.

Things to Remember

• Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and is used in the pricing of risky securities.
• Assumptions of CAPM include rational investors, risk-averse behavior, a single-period investment horizon, perfect capital markets, homogeneous expectations, no taxes, and no transaction costs.
• The CAPM equation is: $E(R_i) = R_f + \beta_i(E(R_m) - R_f)$, where $E(R_i)$ is the expected return on asset $i$, $R_f$ is the risk-free rate, $\beta_i$ is the asset's beta, and $E(R_m)$ is the expected return on the market portfolio.
• Investors in CAPM are assumed to hold a diversified portfolio that includes all risky assets in the market in proportion to their market values.
• The CAPM helps in determining the required rate of return for an asset given its risk compared to the overall market.