In the Development of the CAPM, a Number of Assumptions

question 42

Multiple Choice

In the development of the CAPM, a number of assumptions are required if the model is to be established on a rigorous basis allowing a for a single derivation of the model. These assumptions involve investor behavior and conditions in the capital markets. Which of the below is not one of these underlying assumptions?

• A) The market is made up of risk-averse investors who measure risk in terms of standard deviation of portfolio return
• B) All investors have a common time horizon for investment decision making (for example, one month, one year, and so on).
• C) Some investors are assumed to have different expectations about future security returns and risks.
• D) Capital markets are perfect in the sense that all assets are completely divisible, there are no transactions costs or differential taxes, and borrowing and lending rates are equal to each other and the same for all investors.

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Definitions:

Semi-annually Compounded

A method of computing interest in which interest is added to the principal balance twice a year, resulting in compound growth.

Effective Rate

The actual rate of interest earned or paid on an investment or loan, taking into account compounding.

Semi-annual Payments

Payments that are made twice a year, typically in the context of loan repayments or income distributions.

Semi-annually Compounded

Relating to the process in which the interest on a loan or investment is calculated and added to the principal amount twice a year.