- 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.
- CAPM additional assumptions:
- All investors have the same CAL.
- No restrictions for borrowing and lending at the risk free rate.
- No restrictions on short-selling.
- Trading volume does not change prices.
- The CML is the efficient market portfolio, but the CAPM can describe the expected returns for all assets and portfolios.

- E(R
_{i}) = Return for asset “i” - R
_{F}= Risk-free rate of return - E(R
_{M}) = Expected return of the market portfolio - β
_{i}= The asset’s beta - Beta is the asset’s sensitivity to the return on the market portfolio
- Beta is a measure of an asset’s risk relative to market portfolio, as asset’s with a beta above 1 are considered riskier than the market and beta’s below 1 are considered less risky than the market.
- β = Cov(R
_{i},R_{M})/σ_{M}^{2} **Security Market Line (SML):**Line produced by the CAPM equation for asset “i”**SMLs & Efficient Markets:**In an efficient market securities are correctly priced when the expected risk and expected return equal the SML price of risk.

CAPM: E(R

_{i}) = R_{F}+ β_{i}[E(R_{M}) – R_{F}]
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