Interview Question: Behind the CAPM

Sample Question #184 (finance)

What are some of the assumptions behind the CAPM? Please be as exhaustive as you can.

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One Response to Interview Question: Behind the CAPM

  1. Brett says:

    ANSWER
     
    This is a very popular interview question, so you should know the answer as long as you claim you’ve studied finance.
     
    The CAPM assumptions are:
     
    – investors make investment decisions based on expected returns and return variances
    – investors share the same expectations about returns and return variances
    – investors are risk-averse
    – investors all invest for the same time horizon
    – a risk-free asset exists
    – investors can borrow and lend freely at the risk-free rate
    – capital markets are perfectly efficient [what does this mean?]
    – there are no transaction costs or taxes
     

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