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 are 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

Quizplus · Accepted Answer

The assumption that investors have homogeneous risk adverse preferences toward taking on risk is a critical assumption used in deriving the CAPM. The other assumptions, such as homogeneous expectations and efficient portfolios, are also important but not as fundamental as the assumption of homogeneous risk preferences.

Which of the Following Is Not an Assumption Used in Deriving