Discuss what characteristics must a portfolio have for CAPM to be useful?

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Expert Solution

For the CAPM to be useful, a portfolio must have the following characteristics:

The portfolio must be fully diversified and there is no firm-specific risk in the portfolio
The portfolio must have only the market risk
The risk-free asset in the portfolio can be bought and sold at the risk-free rate
There are no transaction costs associated with buying and selling the stocks within the portfolio
Any number of stocks can be bought and sold at the market price

jeff jeffy answered 2 years ago

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