IPT 1 Chapter 9

Question 1

What is the Capital Asset Pricing model (CAPM)?

Answer 1

This gives the relationship between the risk of an asset and its expected return

Question 2

What is the first assumption of the CAPM?

Answer 2

Individual behavior
1. Investors are rational, mean-variance optimizers
2. Investors have a common investment horizon
3. Investors all use identical input list and have homogeneous expectations

Question 3

What is the second assumption of the CAPM?

Answer 3

Market structure, perfect markets, perfect competition
1. All assets are publicly held and trade on public exchanges
2. Investors can borrow and lend at a common risk-free rate
3. No taxes
4. No transaction costs

Question 4

What are the implications of CAPM?

Answer 4

1. If CAPM is true then holding the market portfolio is efficient
2. Any project/investment can be considerred an asset

Question 5

What are the Criticisms of CAPM?

Answer 5

1. Assumptions are very restrictive
2. What is the market portfolio?