What of the following assumptions is NOT true when conducting analysis using CAPM model?
A)Market is frictional.
B)Expectations are homogeneous.
C)Investors hold risky assets in the same proportions. Their CML is the same and they all have market portfolio M.
D)Market is in equilibrium.

Question

Quizplus · Accepted Answer

In the CAPM analysis framework, the assumption is that the market is frictionless. Thus, it assumes there are no transaction costs, taxes, or holding constraints. This will allow free market transactions.
Key Takeaway: This assumption is unrealistic and is relaxed by adding another term to the CAPM. When adding another term to CAPM model, the analysis depends on the tax parameters since investors face taxes on dividends or capital gains of different types.

What of the Following Assumptions Is NOT True When Conducting