Capital Asset Pricing Model ( Capm ) Essay

1017 Words Jan 6th, 2016 5 Pages
There are different asset pricing models used in establishing the required rate of return for different types of assets. The models, including the capital asset pricing model (CAPM), the Arbitrage Pricing Theory (APT), and the Dividend Discount Model (DDM) use several assumptions regarding the information available to investors to establish the value of assets. Information is essential in the financial markets, it influences investors decision to invest and how successful is the investment if one gets it right. This is achieved after investors incorporate this information in their assets pricing models such as the Capital asset pricing model (CAPM) and the Arbitrage pricing model (APT). both models are build on assumptions which explain the type of information available to investors when deciding on which asset to invest in. Accordingly, this essay will describe the assumptions of each model regarding the availability of information required by investors to make decisions regarding their investments. Moreover, it will explain the relation of information to investors with different risk preferences. Finally, it will describe the role of market intermediaries in providing information.
Like any economic model, the CAPM is build on assumptions that are not entirely realistic, however, it helps in establishing a starting point for investors to price financial assets. The CAPM assumes that all investors have the same access to information and same beliefs regarding the expected…

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