If investors do not know their investment horizons for certain
A) the CAPM is no longer valid.
B) the CAPM underlying assumptions are not violated.
C) the implications of the CAPM are not violated as long as investors' liquidity needs are not priced.
D) the implications of the CAPM are no longer useful.
E) none of these are true.

Question

Quizplus · Accepted Answer

The CAPM assumes that investors have a certain investment horizon and that they are rational and risk-averse. If investors do not know their investment horizons for certain, the implications of the CAPM are not violated as long as their liquidity needs are not priced. This means that the risk premiums will reflect only the market risk and not the liquidity risk. Therefore, choice C is the correct answer.

If Investors Do Not Know Their Investment Horizons for Certain