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Chapter 17

Assumptions of the CAPM

 Well diversified investors – who only need to be compensated for systematic
risk

 Perfect capital market – no taxes, no transaction costs, perfect information, et

 Unrestricted borrowing/lending at the risk-free rate

 Single period transaction horizon – usually one year

 CAPM assumes an efficient market where it is possible to diversify away
unsystematic risk, and no transaction costs

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