Use the following information to answer the question(s)below.
Suppose that all stocks can be grouped into two mutually exclusive portfolios (with each stock appearing in only one portfolio): growth stocks and value stocks.Assume that these two portfolios are equal in size (market value),the correlation of their returns is equal to 0.6,and the portfolios have the following characteristics: The risk free rate is 3.5%.
-Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)?
A)Investors have homogeneous expectations regarding the volatilities,correlation,and expected returns of securities.
B)Investors have homogeneous risk adverse preferences toward taking on risk.
C)Investors hold only efficient portfolios of traded securities,that is portfolios that yield the maximum expected return for the given level of volatility.
D)Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate.

Question

Use the following information to answer the question(s)below.
Suppose that all stocks can be grouped into two mutually exclusive portfolios (with each stock appearing in only one portfolio): growth stocks and value stocks.Assume that these two portfolios are equal in size (market value),the correlation of their returns is equal to 0.6,and the portfolios have the following characteristics:  The risk free rate is 3.5%.
-Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)?
A)Investors have homogeneous expectations regarding the volatilities,correlation,and expected returns of securities. 
B)Investors have homogeneous risk adverse preferences toward taking on risk. 
C)Investors hold only efficient portfolios of traded securities,that is portfolios that yield the maximum expected return for the given level of volatility. 
D)Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate.

Quizplus · Accepted Answer

The assumption that investors have homogeneous risk adverse preferences toward taking on risk is not used in deriving the CAPM, as the CAPM assumes that investors are rational and will choose the portfolio with the highest expected return for a given level of risk, regardless of their individual risk preferences. The other assumptions listed are used in deriving the CAPM.

Use the Following Information to Answer the Question(s)below