Which one of the following is NOT a key assumption underlying the CAPM?
A) Investors prefer portfolios with lower standard deviations.
B) Assets are infinitely divisible.
C) Investors may borrow or lend at a single risk free interest rate.
D) Taxes and transactions costs reduce market liquidity.

Question

Quizplus · Accepted Answer

This assumption is not a key assumption of the CAPM. The other three assumptions (investors prefer low standard deviation portfolios, assets are infinitely divisible, and investors can borrow or lend at a single risk free rate) are key assumptions that form the basis of the CAPM. Taxes and transactions costs are acknowledged in the CAPM, but they are not key assumptions of the model.

Which One of the Following Is NOT a Key Assumption