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The assumptions underlying the CAPM's development are as follows, taken fromIntermediate Financial Managementthe Ninth Edition, by Eugene F. Brigham and Phillip R. Davis:

1. All investors focus on a single holding period, and they seek to maximize the expected utility of their terminal wealth by choosing among alternative portfolios on the basis of each portfolio's expected return and standard deviation.

2. All investors can borrow or lend an unlimited amount at a given risk-free rate of interest and there are no restrictions on short sales of any assets.

3. All investors have identical estimated of the expected returns, variances, and covariances among all assets (that is, investors have homogeneous expectations).

4. All assets are perfectly divisible and perfectly liquid (that is, marketable at the going price).

5. There are no transaction costs.

6. There are no taxes.

7. All investors are price takers (that is, all investors assume that their own buying and selling activity will not affect stock prices).

8. The quantities of all assets are given and fixed.

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Q: What are the assumptions of CAPM?
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how does APT addresses CAPM weaknesses


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because the contenders to CAPM are worse than CAPM. For a thorough treatment of this topic visit http://pages.stern.nyu.edu/~adamodar/


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The present stock value evaluation is one of the methods of share valuation which does not use CAPM.


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Investors care about mean and variance of returns only.They have homogeneous expectations.They have identical investment horizons.There is unlimited borrowing and lending at the risk-free rate.All assets are marketable.Unlimited short sales are allowed.Investors are price takers.There are no taxes and no transaction costs.Assets are perfectly divisible.


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When was CAPM developed?

Harry Markowitz established the foundation of modern portfolio theory in 1952. The CAPM was developed twelve years later in articles by William Sharpe, John Lintner, and Jan Mossin.


Who developed CAPM?

Harry Markowitz established the foundation of modern portfolio theory in 1952. The CAPM was developed twelve years later in articles by William Sharpe, John Lintner, and Jan Mossin.


Is there a connection between the Sharpe optimal ratio and the CAPM?

The portfolio with the highest Sharpe ratio is on the efficient frontier, according CAPM. The Excel spreadsheet at the related link allows you to calculate a Sharpe optimal portfolio


What is the CAPM formula?

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