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1

Your intuition is correct, the CAPM does not assume every individual has the same degree of risk aversion. From page 280 of Bodie, Kane, and Marcus Investments (8th ed) (Chapter 9 The Capital Asset Pricing Model) "The thrust of these assumptions [of the basic CAPM] is that we try to ensure that individuals are alike as possible, with the notable exceptions ...


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That is only an assumption. Indeed, you should always keep in mind the difference between Asset Allocation and Capital Allocation. You can see Asset Allocation as the first step of making investments, where you want to decide which securities will provide you with meaningful risk-return characteristics. Of course, Markowitz allocation is the stronghold ...


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