For each of the asset pricing models (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 sd0 to sd1 < sd0 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.

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