Even Though Many of the CAPM Assumptions Are Violated in the Real

question 41

Multiple Choice

Even though many of the CAPM assumptions are violated in the real world which of the following provides a reason to use the model in investment decisions?

• A) The model helps to understand and to predict the investment process.
• B) It is only the secondary conclusions of the CAPM that are violated in the real world.
• C) Most investors are able to borrow as well as lend at the risk free rate of interest.
• D) It is still reasonable to assume most investors will prefer portfolios with lower standard deviations.

---

Definitions:

T-Table Values

Values in a table that represent critical values of the t-distribution used in hypothesis testing, dependent on the desired significance level and degrees of freedom.

Expected Value

The weighted average of all possible values that a random variable can take on, with the weights being the probabilities of each outcome.

Simple Linear Regression

A method for modeling the relationship between a single independent variable and a dependent variable by fitting a linear equation to observed data.

Confidence Interval Estimate

A statistical method used to express the uncertainty associated with a sample statistic by specifying an interval likely to encompass the true population parameter.