Exam assumptions

Question 1

What are the CAPM assumptions?

Answer 1

• Investors buy/sell securities at market prices and borow/lend at rf
• Investors only hold efficient portfolios that yield maximum E(r) for a given volatility
• Investors have homogenous expectations about volatilities etc of securities

Question 2

What are the assumptions of the APT model?

Answer 2

• Securities can be described with a factor model
• There are enough securities to diversify away firm specific risk
• Arbitrage will disappear quickly

Question 3

What are the statements/assumptions of the EMH?

Answer 3

• Current market prices reflect all available information
• It is impossible to earn excess returns by using information available to the market to guide trading
• Information is rapidly and accurately disseminated
• You cannot predict price changes using current info

Question 4

The DDM Model implies a stock’s value will be greater:

Answer 4

• The larger the expected dividend per share
• The lower the market capitalisation rate
• The higher the expected growth rate of dividends