The following are assumptions made by the CAPM model: All investors are risk-averse by nature. Investors have the same time period to evaluate information. There is unlimited capital to borrow at the risk-free rate of return.
What are the practical implications of the CAPM?
The CAPM has asset pricing implications because it tells what required rate of return should be used to find the present value of an asset with any particular level of systematic risk (beta). In equilibrium, every asset's expected return and systematic risk coefficient should plot as one point on the CAPM.
What are the assumptions and limitations of CAPM?
The CAPM has serious limitations in real world, as most of the assumptions, are unrealistic. Many investors do not diversify in a planned manner. Besides, Beta coefficient is unstable, varying from period to period depending upon the method of compilation. They may not be reflective of the true risk involved.