You are the managing partner at a venture capital firm, and you feel that to sol

Question

You are the managing partner at a venture capital firm, and you feel that to solidify your status as a full-service institution, you must bolster your in-house valuation division. Part of this process is remembering some of the basic assumptions of the Capital Asset Pricing Model (CAPM). One of your team members submitted the list of assumptions that follows. Which statements are true CAPM assumptions? Check all that apply. Investors have homogenous expectations. There are no taxes. Investment decisions are adjustable for changes in stock price. There are transaction costs. Investors can borrow an unlimited amount at a risk-free rate. All investors prefer the security that provides the highest return for a given level of risk. The CAPM helps in determining the required return on a stock and its relation with risk. Along with variability of returns, there is another important dimension to risk-the risk of failure. From a shareholder wealth maximization perspective, the cost of failure (both direct and indirect) can be very high for the company as well as its shareholders. Diversification of businesses and investments made by the company can help a firm decrease the firm's cost of capital. Since diversification helps in increasing the overall risk of the firm, the default risk associated with the firm's debt securities also decreases.

Explanation / Answer

Investor have homogeneous expectation

There are no taxes

Investor can borrow at risk free rate

An investor prefer the security that provides the highest return for a given level of risk

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