Question

9. The Arbitrage Pricing Theory Which of the following statements about the Arbitrage Pricing Theory (APT) are correct? Check all that apply. The APT is more restrictive than the Capital Asset Pricing Model (CAPM). The APT assumes that all investors hold the market portfolio The APT does not identify the relevant factors. The APT does not restrict the number or nature of the factors relevant to the determination of a stock's return.

Answer 1

The arbitrage pricing theory (APT) says that there a no. of factors influencing stock return rather than only one as per CAPM. Thus it relaxes the assumptions about the nature and no. of factors and is less restrictive than CAPM. However, it does not identify those factors. It also does not assume that all investors hold the market portfolio

So the correct options are 3 and 4

As per APT

GA's required rate of return = b1*r1+ b2*r2+b3*r3

= -0.5*8%+0.4*12%+1.1*5% = 0.063 or 6.30%

As per CAPM,

GA's required rate of return = Risk free rate+ beta of GA * (market return - risk free rate)

=8%+2.0* (10%-8%)

=12%