Question

One of the assumptions of the CAPM is that investors exhibit myopic behavior. What does this mean?

a. Investors focus on short-term gains
b. Investors have a long-term perspective
c. Investors are risk-averse
d. Investors do not consider market trends

Answer 1

CAPM assumes myopic behavior in investors, indicating they prioritize short-term gains over long-term prospects, potentially leading to market inefficiencies.

Step-by-step explanation:

The assumption that investors exhibit myopic behavior as presented in the Capital Asset Pricing Model (CAPM) suggests that investors focus on short-term gains rather than looking at the long-term potential of their investments. This assumption challenges the view that markets are always efficient, as short-term focus can lead to mispricing of assets if investors are frequently reacting to immediate events rather than considering long-term trends. Myopic behavior can create opportunities for those with a long-term perspective to capitalize on these short-term inefficiencies.