In general, it is assumed that standard deviation of past returns is a perfect proxy for the future risk associated with a security.

 

Furthermore, the Capital Asset Pricing Model assumes that all investors:

* maximize their economic utilities

* are rational and risk-averse

* diversify across a range of investments

* cannot influence or set prices

* can lend and borrow unlimited amounts at a risk-free rate of interest

* trade without transaction or taxation costs

* deal with securities that can be divided into small parcels

* have access to information that is readily available to all investors