FRM Financial Risk Manager Practice Test

In the CAPM analysis framework, the assumption is that the market is frictionless. Thus, it assumes there are no transaction costs, taxes, or holding constraints. This will allow free market transactions.

Key Takeaway: This assumption is unrealistic and is relaxed by adding another term to the CAPM. When adding another term to CAPM model, the analysis depends on the tax parameters since investors face taxes on dividends or capital gains of different types.