sleepybird
Active Member
Anyone came up with an acronym for memorizing these? 
Standard CAPM assupmtion acronym
- Thread starter sleepybird
- Start date
sleepybird - that would be awesome, especially as the switch to Elton for CAPM expanded the assumption list to ten. Although some of the assumptions aren't easily summarized by a
single word? ... although for fun, here is my try and getting to one word summaries:
1. F for lack of Friction: There are no transaction costs. There is no cost ( friction) of buying or selling any asset.
2. D for divisible: Assets are infinitely divisible. This means that investors could take any position in an investment, regardless of the size of their wealth.
3. T for personal tax: Absence of personal income tax.
4. P for price taker: An individual cannot affect the price of a stock by his buying or selling action. "This is analogous to the assumption of perfect competition. While no single investor can affect prices by an individual action, investors in total determine prices by their actions."
5. N for normality (first two moments): Investors are expected to make decisions solely in terms of expected values and standard deviations of the returns on their portfolios.
6. S for short sales: Unlimited short sales are allowed.
7. B for borrowing: Unlimited lending and borrowing at the riskless rate. "The investor can lend or borrow any amount of funds desired at a rate of interest equal to the rate for riskless securities."
8. H for homogeneity (my vote for the most crucial and possibly most unrealistic assumption at the same time): Homogeneity of expectations (i): Investors are assumed to be concerned with the mean and variance of returns ( or prices over a single period), and all investors are assumed to define the relevant period in exactly the same manner.
9. E for expectations: All investors are assumed to have identical expectations with respect to the necessary inputs to the portfolio decision. "As we have said many times, these inputs are expected returns, the variance of returns, and the correlation matrix representing the correlation structure between all pairs of stocks."
10. M for marketable: Assets are marketable. "All assets, including human capital, can be sold and bought on the market."
okay so my pass gets: F D T P N S B H E M ... hmmm, now just need to make a story out of that
single word? ... although for fun, here is my try and getting to one word summaries:
1. F for lack of Friction: There are no transaction costs. There is no cost ( friction) of buying or selling any asset.
2. D for divisible: Assets are infinitely divisible. This means that investors could take any position in an investment, regardless of the size of their wealth.
3. T for personal tax: Absence of personal income tax.
4. P for price taker: An individual cannot affect the price of a stock by his buying or selling action. "This is analogous to the assumption of perfect competition. While no single investor can affect prices by an individual action, investors in total determine prices by their actions."
5. N for normality (first two moments): Investors are expected to make decisions solely in terms of expected values and standard deviations of the returns on their portfolios.
6. S for short sales: Unlimited short sales are allowed.
7. B for borrowing: Unlimited lending and borrowing at the riskless rate. "The investor can lend or borrow any amount of funds desired at a rate of interest equal to the rate for riskless securities."
8. H for homogeneity (my vote for the most crucial and possibly most unrealistic assumption at the same time): Homogeneity of expectations (i): Investors are assumed to be concerned with the mean and variance of returns ( or prices over a single period), and all investors are assumed to define the relevant period in exactly the same manner.
9. E for expectations: All investors are assumed to have identical expectations with respect to the necessary inputs to the portfolio decision. "As we have said many times, these inputs are expected returns, the variance of returns, and the correlation matrix representing the correlation structure between all pairs of stocks."
10. M for marketable: Assets are marketable. "All assets, including human capital, can be sold and bought on the market."
okay so my pass gets: F D T P N S B H E M ... hmmm, now just need to make a story out of that
sleepybird
Active Member
Thanks for the one word summary.
Rearranging as F E D M P S N B T H.
FED's current Monetary Policy iS Not necessarily the Best during this Time Horizon.
That is the best I can come up with. Other suggestions/improvements please.
Rearranging as F E D M P S N B T H.
FED's current Monetary Policy iS Not necessarily the Best during this Time Horizon.
That is the best I can come up with. Other suggestions/improvements please.
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