Validity of the CAPM depends on
A) accurate estimation of ex ante returns
B) the existence of a risk-free asset
C) good measurement of risk
D) mean-variance efficiency of the market portfolio
E) all of the above

Question

Quizplus · Accepted Answer

All of the factors listed are crucial for the validity of the CAPM. Accurate estimation of ex ante returns is necessary to obtain reliable beta coefficients, the existence of a risk-free asset is essential for calculating the market risk premium, good measurement of risk is crucial for computing the systematic risk of assets, and mean-variance efficiency of the market portfolio is necessary for the CAPM to hold in equilibrium.

Validity of the CAPM Depends on