Question

Which of the following statements below is correct? There might be more than one correct answer.

a. Based on the CAPM model there are no taxes or transaction costs in the market and information is costless and available to all investors

b. Based on the CAPM model investors are price takers and investments are limited to financial instruments

c. Based on the CAPM model the risk premium on the market as a whole depends on the average risk aversion of all market participants

d. Based on the CAPM model the market portfolio contains all securities within the market and the weight of each security is its market value as a percentage of the total market

Answer 1

a) One of the assumptions of the CAPM model is that there are no taxes and transaction costs. Hence the first statement is true.

b) Investors are price takers and they cannot influence prices. Hence the second statement is true.

c) Conclusions are drawn on the basis of CAPM indicate that risk premium of the market depends on the average risk aversion of all market participants because it is referred to as representative investor. Thus the statement is true.

d) As per CAPM model, each security is proportionately derived as a percentage of total market value since all investors hold same portfolio in proportion of the whole market. Thus the statement is true that the market portfolio contains all securities within the market and weight of each security is the market value as a percentage of total market.

Thus all the above statements are true.