Sample Question #184 (finance)
What are some of the assumptions behind the CAPM? Please be as exhaustive as you can.
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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