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What Are The Assumptions On Which Capm Is Based? What Are The Essential Elements Of Capm?

Answer»

CAPM (Capital Asset Pricing MODEL) is a risk and return model. It predicts the relationship between risk of an asset and its expected result. This model assumes that:

  • Investors are risk averse.
  • Investors are known with all the market fluctuations and information.
  • There are no restrictions and TRANSACTION costs on investment.
  • Information available in the market will be digested by the capital markets.
  • Investors have identical time HORIZONS.
  • Investors have homogeneous EXPECTATIONS about risk and return of securities.

The essential elements of CAPM are:

  • Risk free rate
  • Market Risk Premium
  • Beta of the SECURITY

CAPM (Capital Asset Pricing Model) is a risk and return model. It predicts the relationship between risk of an asset and its expected result. This model assumes that:

The essential elements of CAPM are:


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