What Does It Mean When the CAPM Is Called "Robust

question 8

Multiple Choice

What does it mean when the CAPM is called "robust?"

• A) The CAPM requires no assumptions.
• B) Even if the CAPM's major assumptions are relaxed, most of its conclusions still hold.
• C) The CAPM is based on realistic assumptions.
• D) No other model can represent stock returns better than the CAPM.

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Definitions:

Instinct Theory

A view that explains human behavior as motivated by automatic, involuntary, and unlearned responses.

Homeostasis

The ability of a living organism to regulate its internal environment to maintain a stable, constant condition despite external changes.

Drive-Reduction Theory

The idea that a physiological need creates an aroused tension state (a drive) that motivates an organism to satisfy the need.

Maintain Homeostasis

The process by which living organisms regulate their internal environment to stabilize health and functioning, despite external changes.