How does the Arbitrage Pricing Theory (APT) differ from and complement the Capital Asset Pricing Model (CAPM)? The Arbitrage Pricing Theory, developed by Stephen Ross, proposes that an asset's returns can be predicted using the linear relationship between the asset's expected return and a number of macroeconomic factors. Unlike CAPM, which uses a single factor (market risk), APT allows for multiple factors to explain asset returns, potentially providing a more comprehensive risk-return framework. These factors might include inflation, GDP growth, interest rates, or market indices. APT is based on the principle that arbitrage opportunities will be eliminated in efficient markets, leading to a pricing equilibrium. While more flexible than CAPM, APT faces challenges in identifying and measuring relevant factors. The theory has important implications for portfolio management, asset valuation, and our understanding of risk premiums in financial markets.

What are the main differences between the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT) model? What are each model’s underlying assumptions, strengths and weaknesses?

Explain the relationship between JENSEN's alpha and the security marketline of the Capital asset pricing model (CAPM).

Carefully explain the Arbitrage Pricing Theory (APT). What is the main assumption the APT is built on?                                                  (b)     With regard to market efficiency, what is meant by the term "anomaly"? Give two examples of market anomalies and explain why each is considered as an anomaly.

In contrast to the capital asset pricing model, arbitrage pricing theory:a. Requires that markets be in equilibrium.b. Uses risk premiums based on micro variables.c. Specifies the number and identifies specific factors that determine expected returns.d. Does not require the restrictive assumptions concerning the market portfolio.

The feature of the general version of the arbitrage pricing theory (APT) that offers the greatest potential advantage over the simple CAPM is the:a. Identification of anticipated changes in production, inflation, and term structure of interest rates as key factors explaining the risk–return relationship.b. Superior measurement of the risk-free rate of return over historical time periods.c. Variability of coefficients of sensitivity to the APT factors for a given asset over time.d. Use of several factors instead of a single market index to explain the risk–return relationship.

What is the Capital Asset Pricing Model (CAPM)?What are some of its key assumptions? Has itbeen empirically verified? What is the role of theSecurity Market Line in the CAPM?

Discuss the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Model (APM) of Roll and Ross. What are the main differences between these two models?

An investor takes as large a position as possible when an equilibrium price relationship is violated. This is an example of:a. A dominance argument.b. The mean-variance efficient frontier.c. Arbitrage activity.d. The capital asset pricing model.

The general arbitrage pricing theory (APT) differs from thesingle-factor capital asset pricing model (CAPM) because theAPT: A. Places more emphasis on market risk.B. Minimizes the importance of diversification.C. Recognizes multiple unsystematic risk factors.D. Recognizes multiple systematic risk factors.