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This video discusses several assumptions of the Capital Asset Pricing Model (CAPM).
The Capital Asset Pricing Model assumes that:
1. Investors buy and sell securities at competitive market prices. An investor is therefore a price-taker and cannot influence the price of a security
2. Investors do not face transaction costs or taxes when they buy and sell securities
3. Investors lend and borrow at the risk-free rate
4. Investors have homogeneous expectations regarding securities (if all investors have access to publicly-available information, their estimates about expected returns, volatilities, etc. are likely to be similar).
5. Investors only hold efficient portfolios of securities. A portfolio is efficient if you cannot find a different portfolio with a higher expected return for the same level of risk (volatility). Thus, if Portfolio A and Portfolio B both have volatility of 20%, but Portfolio A has a higher expected return, investors will prefer Portfolio A to Portfolio B.-
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