The Impact of Investor Heterogeneity on Asset Pricing Models: A Reconstruction Incorporating Risk Preferences, Information Acquisition, and Investment Experience
Year: 2025
Type: article
Abstract: The Capital Asset Pricing Model (CAPM) has been a foundational framework in finance, offering a method for estimating asset returns based on market risk. However, the traditional CAPM assumes investor homogeneity, disregarding differences in risk preferences, access to information, and investment experience. This paper addresses the limitations of CAPM by incorporating investor heterogeneity into asset pricing models, proposing an extended framework that accounts for risk preferences, information acquisition, and investment experience. The study suggests that varying levels of investor risk aversion, access to information, and experience significantly influence asset pricing and market behavior. Acknowledging these factors provides a more accurate and nuanced reflection of real-world markets, where investors are not homogeneous. The proposed model demonstrates enhanced explanatory andpredictive power regarding asset returns, improving resource allocation and investment decisions. Furthermore, the model offers insights for financial professionals, such as portfolio managers and financial advisors, by enabling more personalized investment strategies tailored to individual investor characteristics. This research challenges the assumptions of the traditional CAPM and presents a more comprehensive framework that could lead to more efficient market outcomes and optimized asset pricing.
Source: CREATIVE ECONOMY
Author: Beibei Chen
Institution: Beijing Jiaotong University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W4410900516