The straightforward generalization of the simple CAPM to international stocks is problematic because
A) inflation-risk perceptions by different investors in different countries will differ as consumption baskets differ.
B) investors in different countries view exchange-rate risk from the perspective of different domestic currencies.
C) taxes, transaction costs, and capital barriers across countries make it difficult for investors to hold a world-index portfolio.
D) All of the options are correct.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

The straightforward generalization of the simple Capital Asset Pricing Model (CAPM) to international stocks is problematic due to various factors including differing inflation-risk perceptions across countries, differing views on exchange-rate risk due to different domestic currencies, and practical barriers such as taxes, transaction costs, and capital barriers that make it difficult for investors to hold a world-index portfolio.

The Straightforward Generalization of the Simple CAPM to International Stocks