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Hi, john. hope u are well
sir am a bit confused with the assumptions of the capital Asset pricing model.
there is question in the opentuition mock, stating that CAPM does not assume that debt is risk free. also i have seen a books stating that CAPM does assume that Debt beta is zero.perhaps i misunderstood the meaning of Beta. so what is the difference between Beta and risk in CAPM
In practice debt is not risk free (although we would expect it to have low risk and therefore a low beta).
CAPM does not assume that debt is risk free. If you look at the asset beta formula that is provided on the formula sheet, you will see that it includes the beta of debt.
I think what you are confusing it with is that in exam questions we do assume that debt is risk free when using the asset beta formula. Therefore the debt beta will be zero, and therefore the last term in the formula is always irrelevant in the exam 🙂
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