1.

The Capital Asset Pricing Model (CAPM) assumes that investors are single-period
planners who share a common input list from security analysis and seek mean-variance
optimal portfolios. This assumption simplifies the modeling framework by focusing on a
single period and aligns with the model's emphasis on efficiency in portfolio selection.
2. The CAPM posits ideal conditions in security markets, including: a. Wide availability of
relevant information about securities to all investors. b. Absence of taxes or transaction
costs, which could distort investment decisions. c. Public trading of all risky assets,
ensuring market liquidity and accessibility. d. Ability for investors to borrow or lend
funds at a fixed risk-free rate, facilitating portfolio optimization.
3. Under these ideal market conditions, all investors hold identical risky portfolios, and the
market portfolio represents the unique mean-variance efficient tangency portfolio in
equilibrium. Consequently, a passive investment strategy becomes efficient, as it aligns
with the market portfolio.
4. The CAPM market portfolio is constructed based on a value-weighted approach, where
each security's weight in the portfolio is proportional to its market value relative to the
total market value of all securities.
5. If the market portfolio is efficient and investors neither borrow nor lend, the risk
premium on the market portfolio is proportional to its variance (σ^2) and the average
coefficient of risk aversion across investors (A): E(rM) − rf = Aσ^2M
6. The CAPM links the risk premium of individual assets or portfolios to the risk premium of
the market portfolio through the beta coefficient: E(ri) − rf = βi[E(rM) − rf] where βi
represents the covariance of the asset's excess return with that of the market portfolio
relative to the variance of the excess return of the market portfolio.
7. When risk-free borrowing is constrained but other CAPM assumptions hold, the security
market line is adjusted to its zero-beta version. In this scenario, the risk-free rate is
replaced by the expected rate of return of the zero-beta portfolio in the expected
return–beta relationship: E(ri) = E(rZ) + βi[E(rM) − E(rZ)]
8. Modifications to the CAPM may be necessary to account for labor income and other
nontraded assets, requiring adjustments to the security market line to accommodate
these factors.
9. The CAPM's applicability may be challenged when investors have longer time horizons or
when their preferences and return distributions change unpredictably over time. In such
cases, a multifactor version of the CAPM may be adopted to incorporate additional
sources of risk and their associated premiums.
10. The Consumption-based Capital Asset Pricing Model (CCAPM) replaces the market
portfolio's excess return with that of a consumption-tracking portfolio, integrating
consumption considerations and evolving investment opportunities within a single-
factor framework.
11. Liquidity costs and liquidity risk can impact security pricing, as investors demand
compensation for expected illiquidity costs and the associated risks. These
considerations are important in assessing the true risk-adjusted returns of securities.