The asset pricing models CAPM Essay Example | Topics and Well Written Essays - 1000 words

The asset pricing ensamples CAPM - Essay grammatical caseFor instance, if investor A buys more of stocks of X than Y, then every investor in the mart will react the akin by buying of stocks X and less of Y. Therefore, from this illustration and the aforementioned explanation, it is evident that the two models assumes that the investors in the market evaluate the learning they have in the same way, hence arriving at the same decisions regarding their investment activities. However, abandoned that investors have homogeneous expectations concerning their returns, level of risk inherent and investment strategies, they will always tend to bear risk averse (Sharpe, 1964).From the explanation above, it is clear that the models of APT and CAPM depend on the publicly available study concerning the returns and level of risk inherent in specific securities (Watson and Head, 2007). Therefore, the models do not specify any extra information that investors should use regarding their invest ment decisions but assume the investor will use the most current information available in the market concerning the different securities, thus, helping them choose the best investment strategies.The proponents of the APT entreat that the model is the best alternative to the CAPM because it has more assumptions requirements that are flexible (Reilly & Brown, 2011). For instance, whereas the capital asset pricing model uses the expected return of a security, APT uses a securitys risk expected return, in addition to, the risk premiums of a couple of macro-economic elements. Therefore, from this proposition it is undeniable that CAPM has more strong assumptions compared to the APT. For instance, whereas the CAPM assumes that there exists a risk free rate in the market, the APT model tries to identify risk premium to modify investors take advantage of any mispriced securities, which is different from the