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Assumptions

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
. portfolio.
6, Investors can lend or borrow at an identical risk-free rate.
7. There are no transaction costs and income taxes.

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