To grapple with the complexities of the real world, the CAPM makes certain simplifying assumptions. Since of these may be relaxed later.
1. All Investors arc price-takers: Their number is so large that no single investor can affect prices.
2. All investors use the mean-variance portfolio selection model. of Markowitz.
3. Assets/securities are perfectly divisible.
4. All investors plan for one identical holding period.
5. Homogeneity of expectation for investors results in identical efficient frontier and optimal
6, Investors can lend or borrow at an identical risk-free rate.
7. There are no transaction costs and income taxes.