Asset pricing models (CAPM and APT) - Essay Example

The information of risk observed in similar types of the asset in the market will help the investor to get a true picture towards acquiring the asset. The observed risk factors will help in determining the real value of that asset (Kerzner & Saladis, 2010). There are many small investors who are the price taker. There is no tax on the asset. Investment should be of public related assets for example: shares and bonds. All the investors are adopting same strategy and provide combine information about the asset (Fabozzi et al., 2006). Investor can get information from the market to apply CAPM model, but it is also possible that the information is incomplete or not at large practiced.

The investors in market applying CAPM pricing model are basically small investors. Small investors usually buy little bit stocks of asset and sell if the price of that asset increased (Kürschner, 2008). The risk factor cannot be perfectly determined by the small investors because they acquire the assets on equilibrium price set by the market. Small investors can take risk but valuable risk factor can be determined by the large investors. Although tax on the asset is generally added to the cost of the asset but in determining the price model of CAPM, the tax factor will not be included.

The information regarding the particular asset does not contain the information of tax imposed on it (Loskamp, 2007). APT is the model which can provide well diversified information about the risk factors as well as expected returns of that asset. Agents are appointed under this model to get information quite reliable regarding the risk and returns of an asset. Agent provides the expected returns of the asset depending on his experience. Risk factor calculated by the agent is more preferable because it is actually based on the whole market review (Focardi & Fabozzi, 2004).

The agents charge price for providing information of the asset. Investor has to choose the agent which has the