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Assumptions of CAPM

4 May, 2015 - 12:31

All investors 1: Template:Unreferenced section

  1. Aim to maximize economic utilities.
  2. Are rational and risk-averse.
  3. Are broadly diversified across a range of investments.
  4. Are price takers, i.e., they cannot influence prices.
  5. Can lend and borrow unlimited amounts under the risk free rate of interest.
  6. Trade without transaction or taxation costs.
  7. Deal with securities that are all highly divisible into small parcels.
  8. Assume all information is available at the same time to all investors.

Further, the model assumes that standard deviation of past returns is a perfect proxy for the future risk associated with a given security.