An assumption of CAPM is that investors do not face transaction costs. In particular, CAPM assumes that
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An assumption of CAPM is that investors do not face transaction costs. In particular, CAPM assumes that markets are liquid in the sense that you can always trade any number of shares you would like to any time. In reality, the overall market may become more illiquid in certain times and less illiquid in other times. When the market is illiquid, investors are more hindered from trading by frictions in the market. Suppose that the price of a certain security tends to go up when the overall market becomes more illiquid. Would you expect this security to have a higher or lower expected return than what the CAPM predicts?
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
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