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8. Describe some capital market imperfections that render the CAPM a less than complete model of...

8. Describe some capital market imperfections that render the CAPM a less than complete model of reality, especially for application to real estate. 13 points.

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Answer #1

Factors associated with Real Estates:

  • No short Sales
  • Transaction Costs
  • Inelastic Supply
  • Real estate information is costly.

Factors associated with CAPM:

  • Unlimited short sales
  • No transaction costs.
  • Perfect Competition.
  • CAPM information is not costly.

So above comparison or factors of real estates and CAPM shows us that CAPM is an incomplete model of reality, especially for the application to real estates.

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