Impacts of Market Segmentation on ICAPM

  • The ICAPM is used by some investors to value any and all risky assets on a global basis.
  • The ICAPM is only valid if international capital markets are integrated.
  • If international capital markets are segmented, then assets with the same risk characteristics will be priced differently in different national markets.
  • When barriers to capital market integration cause investors to avoid the balanced world market portfolio, higher allocations will be made to specific countries and specific securities, causing inefficient asset pricing.
  • This inefficiency makes an argument for active portfolio management.