CFA Practice Question

CFA Practice Question

Which of the following is not an assumption of the capital market theory?
A. Investors are not necessarily Markowitz efficient. They do not necessarily choose points along the efficient frontier.
B. All investments are infinitely divisible, meaning that it is possible to buy or sell fractional shares of any asset or portfolio.
C. Capital markets are in equilibrium.
Explanation: The capital market theory extends portfolio theory to develop a model for pricing all risky assets. That model is the capital asset pricing model (CAPM). Capital market theory actually assumes that all investors are Markowitz efficient investors who want to choose points only on the efficient frontier. This is perhaps one of the most important assumptions of the capital market theory, since it underlines a type of rationality among risk averse investors.

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