Posted: December 28th, 2015

Explain the intuition behind this result. – What is the prediction of CAPM and APT regarding investor demand for information in equilibrium: should an individual investor try to get information if doing so is costly?

Your essay should have up to 1000 words, and should be submitted on Turnitin either in word or in pdf format.
For each of the asset pricing models we saw in class (CAPM, APT, DDM), your essay should describe the assumptions about what information investors have on the available assets, addressing the following four questions: – What information does each model assume is available to investors?  – Describe how this information is used in the pricing equations in each model? – In the mean-variance (Markowitz) framework, show that the value for an investor of information that reduces the standard deviation of the optimal risky portfolio from ?! to ?!<?! is proportional to the share of wealth assigned to P times the percentage change in variance. – Show that this implies that information about variance is more valuable to less risk averse investors. Explain the intuition behind this result.  – What is the prediction of CAPM and APT regarding investor demand for information in equilibrium: should an individual investor try to get information if doing so is costly?   – Based on your knowledge of market intermediaries – e.g. banks, mutual funds, brokers – and the services they provide, assess whether this is a good description of the demand for information in the real world. Comment on the assessment in light of the efficient market hypothesis.