The capital asset pricing model (CAPM) assumes that…
… investors agree on the return, risk and correlations of all assets and invest in all assets accordingly
Investors clearly disagree frequently on all of these, and many investors have limits on what asset classes they can invest in.
… perfect capital markets exist: there are no restrictions on borrowing and lending
Many investors face leverage constraints, forcing them to overweight risky assets in search for higher returns.
… all investors have the same time horizon
Investors with different time horizons consider different assets “risk-free”
Some investors have real vs. nominal liabilities
Different investors will choose different portfolios to leverage or de-leverage
… investors can securitize and trade all wealth
The majority of the world’s wealth is not securitized (human capital, residential real estate, etc.)
Investors owning different non-tradable assets could chose different optimal portfolios of tradable assets
… all investors are mean-variance optimizers
Many are not
Tags: CAPM
