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:

Social Pressure

The influence that is exerted on individuals by others, or by society as a whole, to act or think in certain ways.

Inconsistent With Attitudes

A psychological state where an individual's behaviors do not align with their beliefs or feelings.

Situations

Instances or sets of circumstances that occur or are perceived by individuals, often influencing their behavior and decisions.

Actions

The process of doing something in order to achieve a goal or perform a task.