Assumption of capital asset pricing models, Electrical Engineering

Q. Assumption of capital asset pricing models?

1) Investor; s objective is to maximize the utility of terminal wealth: investor aims at maximizing the utility of hi9s wealth rather than the wealth of the return . the difference between then is that individual preference are taken into the accounts in the utility concept while some have a preference for the large risk who have a increasing the market utility for wealth and for the others with less preference of the risk the incremental risk wealth will less attractive if it is attached with the more risk

2) investor have homogeneous expectoration of risk and the return : investor have same expectation of risk and return because without this , the estimate of the means and variance may lead to different forecasting with the result that the efficient portfolio of each will be different for the others . if the investor do not have similar expectation , there will be no homogeneity in their conception and no signal efficient frontier line will be apply to all.

3) investor make a choice on the basis of the risk and return: investor makes a investment decision on a relation basis, developing, depending on the relation on the basis assessment of risk and return risk is measured by two factors means and variance in CAPM, we assume that rational investor diversify away their unsystemic risk and only systemic risk remains which varies with the beta of the security.

4) Investor have identical time horizons: this assumption suggests that investors from the portfolio to achieve the wealth at a single, common terminal rate that single common horizon allows us to constructs a single period model. This models implies that the investor buys the all the assets in their portfolio at one point in time and sell them, at some undefined but common point at the future. This assumption is obviously unrealistic.

5) Information is freely and simultaneously available to investors: investors will have access to all availed information at no cost and no loss of time if the information is not the same for all no common efficient frontier line can be drawn.

Posted Date: 6/20/2013 1:37:12 AM | Location : United States

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