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Question 2 (30 points) 2.1 (12 points) State the assumptions of the Capital Asset Pricing Model (CAPM). Explain and, where re

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Assumptions of CAPMGraph Cahital Market hine Elra carital Market hine Return E(rm) Standard dumation (a) CAPM E(Ri) = Rp + Bi x C ECRA] - Rp) Re

  1. Aim to maximize economic utilities.
  2. Are rational and risk-averse.
  3. Are broadly diversified across a range of investments.
  4. Are price takers, i.e., they cannot influence prices.
  5. Can lend and borrow unlimited amounts under the risk free rate of interest.
  6. Trade without transaction or taxation costs.
  7. Deal with securities that are all highly divisible into small parcels.
  8. Assume all information is available at the same time to all investors.
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