Assumptions in CAPM and cost of failure You are the managing partner at a venture capital firm, and you feel that to solidify your status as a full-service institution, you must bolster your in-house valuation division. Part of this process is remembering some of the basic assumptions of the Capital Asset Pricing Model (CAPM). One of your team members submitted the list of assumptions that follows. Which statements are true assumptions of the CAPM ? Check all that apply. The risk-free rate changes over time. Transaction costs are netted against expected returns. All investors prefer the security that provides the highest return for a given level of risk. All assets are perfectly divisible and liquid. There are no transaction costs. The CAPM helps in determining the required return on a stock and its relationship with risk. Along with variability of returns, there is another important dimension to risk-the risk of failure. From a shareholder wealth maximization perspective, the cost of failure (both direct and indirect) can be very high for the company as well as its shareholders. Diversification of businesses and investments made by the company can help a firm _____the firm's cost of capital. Since diversification helps in _____the overall risk of the firm, the default risk associated with the firm's debt securities also_____ View less »