CAPM When There Are Transaction Costs

In traditional CAPM we have two basic assumptions: 1) investors invest their money in all risky assets; 2) regardless of their preference ,the ratios the investors invest in risky assets are identical between investors. Here we don't make allowance for transaction costs. But in reality ,we know there are transaction costs, which makes investors invest in finite assets, and we should amend our traditional CAPM. Here what we talk about transaction costs includes : the commision you must pay when you buy a asset, the costs when you collect information and analyse, etc. It is just because existence of transaction costs that the investors invest in some assets , other than invest in all risky assets. In this paper we first retrospect the assumptions and the induction of the traditional CAPM ,then begin our topic. Firstly, we introduce a simple model ,in which we will deduce that when there are transaction costs , investors will spend their money on some assets; secondly, we will examine how to price a asset,when there exits transaction costs. We can deduce a important conclusion that the assets' yield is correlated with the assets' variance; last section is our empirical analysis,we regress the assets' yield ,we will find that the relation between the yield and the variance is prominent.