Some of these assumptions are described as follows: 1) All investors are single period wealth maximizers who purchase securities based on mean, variance of expected return; 2) Unrestricted borrowing and lending of riskless assets including unlimited short sales of risky assets 3) The financial market is perfectly competitive and all investors are price takes; 4) The quantity of securities is fixed; 5) All securities have perfect liquidity, i.e., there are no significant transaction costs and taxes are neutral; 6) There are no inflation or interest rate changes (Naylor and Tapon, 1982). When we consider these assumptions, all investors will hold the same portfolio, likewise, the CAPM will simply follow Markowitz mathematics (Blume, 1992). However, there are plenty of studies that have been criticizing the CAPM for its unrealistic assumptions. More detailed interpretation and critique of those unrealistic assumptions will be given in the following Section
Some of these assumptions are described as follows: 1) All investors are single period wealth maximizers who purchase securities based on mean, variance of expected return; 2) Unrestricted borrowing and lending of riskless assets including unlimited short sales of risky assets 3) The financial market is perfectly competitive and all investors are price takes; 4) The quantity of securities is fixed; 5) All securities have perfect liquidity, i.e., there are no significant transaction costs and taxes are neutral; 6) There are no inflation or interest rate changes (Naylor and Tapon, 1982). When we consider these assumptions, all investors will hold the same portfolio, likewise, the CAPM will simply follow Markowitz mathematics (Blume, 1992). However, there are plenty of studies that have been criticizing the CAPM for its unrealistic assumptions. More detailed interpretation and critique of those unrealistic assumptions will be given in the following Section