Question

what are the implications of relaxing the assumptions of CAPM for the effectiveness of predicting and computing expected return on stock using CAPM?

Thanks

Answer 1

assumptions made by the CAPM, only three appear needed for the APT:

(i) Investors seek return tempered by risk: they are risk-averse and seek to ma their terminal wealth.

(ii) Investors can borrow and lend at the risk-free rate.

(iii) There are no market frictions such as transactions costs, taxes, or restriction short-selling.

(iv) Investors agree on the number and identity of the factors that are important systematically in pricing assets.

(v) There are no riskless arbitrage profit opportunities.