An assumption of CAPM is that investors do not face transaction costs. In particular, CAPM assumes...
An assumption of CAPM is that investors do not face transaction costs. In particular, CAPM assumes that markets are liquid in the sense that you can always trade any number of shares you would like to any time. In reality, the overall market may become more illiquid in certain times and less illiquid in other times. When the market is illiquid, investors are more hindered from trading by frictions in the market. Suppose that the price of a certain security tends to go up when the overall market becomes more illiquid. Would you expect this security to have a higher or lower expected return than what the CAPM predicts?
Homework Answers
CAPM assumes that markets are liquid. When the market is illiquid, investors are more hindered from trading by frictions in the market because at this time returns in the market are less.
If price of a certain security tends to go up when the overall market becomes more illiquid it is when the returns are high. But for illiquid stocks CAPM assumes lower return. Hence I expect this security to have a higher expected return than what the CAPM predicts.
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An assumption of CAPM is that investors do not face transaction
costs. In particular, CAPM assumes...
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help pls Questions 21-27 are based on the following information. CAPM and stock valuation. Your aunt, Beth, plan...
help pls
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help pls
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