Which of the following has the assumptions of absence of personal taxes, single-period investment and riskless borrowing or lending?
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A. B. C. D.B
The correct answer is B. Capital Asset Pricing Model.
The Capital Asset Pricing Model (CAPM) is a financial model that helps investors determine the expected return on an investment given its level of risk. The model is based on a set of assumptions that include the absence of personal taxes, a single-period investment horizon, and riskless borrowing or lending.
The assumption of the absence of personal taxes is important because it allows the model to focus on the relationship between the risk of an investment and its expected return, without the added complication of personal tax considerations.
The assumption of a single-period investment horizon means that the model assumes that investors make all of their investment decisions at once, without the possibility of adjusting their portfolio over time.
Finally, the assumption of riskless borrowing or lending means that investors can borrow or lend money at a risk-free rate, which is typically represented by the rate of return on government bonds.
Together, these assumptions help to simplify the model and make it easier to understand the relationship between risk and return. However, in the real world, these assumptions may not hold, and investors may need to consider other factors when making investment decisions.
Modern Portfolio Theory (A), Binomial Options Pricing Model (C), and Arbitrage Pricing Theory (D) all make different assumptions and are used for different purposes in finance. Modern Portfolio Theory, for example, assumes that investors are rational and seek to maximize their returns while minimizing risk. The Binomial Options Pricing Model is used to price options contracts, while Arbitrage Pricing Theory is used to explain the relationship between the expected return on an asset and various factors that may influence that return.