CAPM & the SML

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  • The Capital Asset Pricing Model (CAPM) assumes only one efficient portfolio, the market portfolio.

  • CAPM and the CML are more strict than simple Mean-Variance and the CAL.

  • CAPM and CAL similarities:

  • Risk averse investors.

  • Shared investor assumptions for expected returns, variances and standard deviations, and covariances of returns.

  • The above variables are the only inputs required to calculate the efficient frontier.

  • No taxes and no transaction costs.

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