Suppositions and vital constituents of CAPM

Question

Write down the suppositions on that CAPM is depends? And also write down its vital constituents?

Answer 1

CAPM (or Capital Asset Pricing Model) is a risk and return model. This is expects the relationship among risk of an asset and its expected outcome. This model supposes that:

- Investors are risk aware.
- Investors are well-known with all the market information and fluctuations.
- There are no limitations and transaction costs on investment.
- Information accessible in the market will be digested through the capital markets.
- Investors have indistinguishable time horizons.
- Investors have uniform expectations concerning risk and return of securities.

The vital constituents of CAPM are illustrated below:

- Risk free rate
- Market Risk Premium
- Beta of the security