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Sir/Madam,
In one of the assumptions of CAPM, the following explanation is given:
“A more serious problem is that, in reality, it is not possible for investors to borrow at the risk-free rate (for which the yield on short-dated Government debt is taken as a proxy). The reason for this is that the risk associated with individual investors is much higher than that associated with the Government. This inability to borrow at the risk-free rate means that the slope of the SML is shallower in practice than in theory.”Can you please explain me this in simpler terms. The first sentence is self explanatory. In the second sentence i don’t understand what does risk associated with individual investors stand for. In the third sentence I don’t understand what does shallower slope mean.
It would be of really great help if you could help me understand this.
Thank you so much in advance.
Regards,
Rajvir Singh Oberai.If the bank is lending you money, then they will charge you a higher rate than they would charge the government. This is because there is more risk for them of you not repaying the money then there is of the government not repaying.
As far as the security market line is concerned, this is not examinable in Paper F9.Everything needed with regard to CAPM is explained in my free lectures on it.
The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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