0 cL cI   Investor Type Net Rate of Return   1 r r cL(x 1) r cI(y 1) 2 r r cL(x 1/2) r cI(y 1/2) . . . . . . . . . . . . n r r cL(x 1/n) r cI(y 1/n)     Notice that the liquidation cost has a greater impact on per-period returns for shorter-term investors. This is because the cost is amortized over fewer periods. As the horizon becomes very large, the per-period impact of the transaction cost approaches zero and the net rate of return approaches the gross rate. Figure 9.9 graphs the net rate of return on the three asset classes for investors of differ- ing horizons. The more illiquid stock has the lowest net rate of return for very short invest- ment horizons because of its large liquidation costs. However, in equilibrium, the stock must be priced at a level that offers a rate of return high enough to induce some investors to hold it, implying that its gross rate of return must be higher than that of the more liquid stock. Therefore, for long enough investment horizons, the net return on class I stocks will exceed that on class L stocks. Both stock classes underperform T-bills for very short investment horizons, because the transactions costs then have the largest per-period impact. Ultimately, however, because the III. Equilibrium In Capital Markets 9. The Capital Asset Pricing Model The McGraw−Hill Companies, 2001           CHAPTER 9 The Capital Asset Pricing Model 283     gross rate of return of stocks exceeds r, for a sufficiently long investment