The CAPM is not testable unless
A)the exact composition of the true market portfolio is known and used in the tests.
B)all individual assets are included in the market proxy.
C)the market proxy and the true market portfolio are highly negatively correlated.
D)the exact composition of the true market portfolio is known and used in the tests, and all individual assets are included in the market proxy.

Question

Quizplus · Accepted Answer

The CAPM (Capital Asset Pricing Model) requires knowledge of the true market portfolio, which includes all investable assets, to be testable. This means both the exact composition of the true market portfolio must be known and used, and all individual assets must be included in the market proxy. This ensures that the market proxy accurately reflects the true market portfolio, which is essential for testing the CAPM.

The CAPM Is Not Testable Unless