This is a model in finance that is used to estimate the required rate of return of an asset and the risk that is likely to occur and thus serves as a pricing model of risky securities in the market.
Assumptions in capital asset pricing model
The model assumes that an investor can borrow and lend money anytime they so desire, and the amount that can be lent or borrowed is unlimited which is always under the risk-free rate of interest. This provision gives the investor an opportunity to improve their business enterprise.
It assumes that all investors have homogeneous expectations. This means that the quality of business enterprise one chooses to invest in is always product specific, and the production of commodities is of the same type, and expectations are usually similar whereby every investor targets company's success with increased returns and reduced risk during production.
The model assumes that information availability is to all investors during the same period. The relevant information to investors is the situation of the market, customer demand, price index and risks involved. The information is relevant for the investment process, the type of product to invest in which is always decided from the market analysis so as to produce a product whose demand is high. The information is also to help the investors to understand the pricing of commodities.
The investors do not influence the price of commodities this is because they find prices already set in the market and have to abide by the developed goods and services pricing index. This is important because it reduces manipulation of prices in the market to promote affordability and access to the available business goods and services.
