Question

If the hypothetical equilibrium is achieved based on CAPM model, market portfolio should be the only...

If the hypothetical equilibrium is achieved based on CAPM model, market portfolio should be the only risky portfolio that all investors hold.

Is the above statement true or false? Give explanations.

and

In a highly competitive financial market, securities are often traded below its intrinsic value in order to encourage trading and attract liquidity.

Is the above statement true or false? Give explanations.

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Answer #1

Answer-

The statement is True.

If the hypothetical equilibrium is achieved based on CAPM model all investors choose to hold market portfolio and market portfolio is on efficient frontier, optimal risky portfolio.

Answer-

The statement is false.
In highly competitive financial market Securities can be undervalued and overvalued ie the market price can be below the intrinsic value or more than the intrinsic value. The trading and liquidity are not related to the intrinsic value of the security.

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