... rather than a common SML as implied by the model. 3) A perfect capital market. CAPM assumes an efficient or perfect capital market. An efficient capital market is one where all securities and assets are always correctly priced and where it is not possible to outperform the market consistently expect by luck. An efficient capital market implies that there are many small investors (all are price takers), all of whom are rational and risk averse; they each posses the same information and the same future expectations about securities. It also assumes that in the financial markets there are no transaction costs, no taxes and no limitations on investments. 4) Investors fully diversified. The CAPM also assumes that investors are fully diversified. In practice many investors, particularly small investors, do not hold highly diversified asset portfolios. 5) Practical data measurement problems. There are also practical problems associated with the model such as difficulties with specifying the risk-free ...

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