Which of the following statements about the Arbitrage Pricing Theory (APT) are correct?

a) The APT requires fewer assumptions than the Capital Asset Pricing Model (CAPM).

b) The APT allows the required return be a function of two, three, four, or more factors.

c) The APT assumes that all investors hold the market portfolio.

d) The APT is a single-factor model.

Question

Sara Edwards

Business

31 January, 11:45

Which of the following statements about the Arbitrage Pricing Theory (APT) are correct?

a) The APT requires fewer assumptions than the Capital Asset Pricing Model (CAPM).

b) The APT allows the required return be a function of two, three, four, or more factors.

c) The APT assumes that all investors hold the market portfolio.

d) The APT is a single-factor model.

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Answers (1)

Know the Answer?

Madeleine · Answer 1

The correct answer is letter "A" and "B": The APT requires fewer assumptions than the Capital Asset Pricing Model (CAPM); The APT allows the required return be a function of two, three, four, or more factors.

Explanation:

The Arbitrage Pricing Theory or APT wages the influence of different macroeconomic factors on an asset's return. If the asset's price is different than the model's projection, an opportunistic investor can buy and sell the asset for a profit. Those macroeconomic factors can include economic output, unemployment, inflation, savings or investment-specific considerations.

The APT is more simple than the Capital Asset Pricing Model (CAPM) which describes the mathematical relationship between systematic risk and expected return, usually for stocks only