Chapter 8: Asset pricing models

Question 1

Extra assumptions for CAPM

Answer 1

Statistical
* Investors have the same estimates of expected returns, variances and covariance over the one period horizon.
* All investors have the same time horizon.

Economic
* All investors can borrow or lend in unlimited amounts at the same risk-free rate.
* The markets for risky assets are perfect. Information is freely and instantly available to all investors and no investor believes that they can affect the price of a security by their own actions.
* All investors measure in the same “currency”

Question 2

Perfect markets characterisitcs

Answer 2

• Many buyers and sellers.
• All investors are perfectly informed.
• All investors behave rationally.
• Large amount of each type of assets.
• Assets can be bought and sold in small quantities.
• No taxes
• No transaction costs