Question

Which of the following are assumptions of the Capital Asset Pricing Model (CAPM)? Check all that apply.

A. All assets are perfectly divisible and liquid.
B. There are no transaction costs.
C. Asset quantities are given and fixed.
D. Transaction costs are netted against expected returns.

Answer 1

The Capital Asset Pricing Model assumes that all assets are perfectly divisible and liquid and that there are no transaction costs.

Step-by-step explanation:

The Capital Asset Pricing Model (CAPM) is built on several assumptions that allow it to model the relationship between the expected return and risk of an investment. Two key assumptions of the CAPM include:

• All assets are perfectly divisible and liquid.
• There are no transaction costs.

These assumptions indicate that in the CAPM world, investors can freely buy and sell fractions of assets without any cost implications, and there is always a ready market for the assets, making them easily convertible to cash.