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Consider the Capital Asset Pricing Model (CAPM) of equilibrium asset pricing. (i) What are the main assumptions of the model? What is the Capital Market

  1. Consider the Capital Asset Pricing Model (CAPM) of equilibrium asset pricing.

(i) What are the main assumptions of the model? What is the Capital Market LineWhat is the Security Market Line?

(ii) Explain how the CAPM provides a simple rationale for the following portfolio strategy:

Diversify your holdings of risky assets according to the proportions of the market portfolio;

Mix this portfolio with the risk free asset to achieve a desired risk-return combination.

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