Question

In a simple CAPM world which of the following statements is/are correct? I. All investors will choose to hold the market portfolio, which includes all risky assets in the world II. Investors' complete portfolio will vary depending on their risk aversion III. The return per unit of risk will be identical for all individual assets IV. The market portfolio will be on the efficient frontier and it will be the optimal risky portfolio

Answer 1

Answer:

The answer is: All of the options are correct

Explanation:

The Capital Asset Pricing Model (CAPM) states that a stock's rate of return is the sum of the risk free rate plus a risk premium. The advantage of the CAPM model is its simplicity, and that it can be used for every type of stocks.

In a simple CAPM world investors would operate the same way as they do now; They will hold investments portfolios that include risky assets; The investor's risk aversion should determine what stocks make up the portfolio; Risk returns should follow the same pattern; Investor will try to make their portfolios be as efficient and profitable as possible.