Question

Which of the following statements about the Arbitrage Pricing Theory (APT) are correct? Check all that apply The APT is more general than the Capital Asset Pricing Model (CAPM) The APT maintains that the realized return on any stock depends on changes unique to the firm. The APT model maintains that the realized returns on stocks depend on unexpected changes in fundamental economic factors The APT identifies all relevant factors that affect the realized returns on stocks Imani, an analyst at Fantastique Partners (FP), models the company's stock assuming that all stocks' returns depend on only three risk factors: inflation, industrial production, and the aggregate degree of risk aversion. The risk-free rate is RF = 5%, the return on the market is r-7%, and the rest of the available data is given in the following table Value 15% 10% 4% 0.4 -0.6 0.9 0.65 Variable The required rate of return on an inflation portfolio, r The required return on an industrial production portfolio, r2 The required return on a risk-bearing portfolio, r3 Factor sensitivity to the inflation portfolio, bi Factor sensitivity to the industrial production portfolio, b2 Factor sensitivity to the risk-bearing portfolio, b3 Fantastique Partners's beta, bfp Using the APT model, Imani calculates that FP's required rate of return is If Imani used the Capital Asset Pricing Model, she wold have calculated that FP's required rate of return is

Please answer

Answer 1

The APT is more general Than CAPM

APT maintains that realized return on stock depends on unexpected changes in fundamental economic factors.

APT identifies all factors that affects the returns on the stock.

The APT equation

Er=rf+B1Rp1+B2Rp2_____BnRpn

Er=5%+.4*15%-.6*10%+.9*4%

Er=.05+.06-.06+.036

Er=.11-.06+.036

Er=.146-.06

Er=.086

Er=8.6%

CAPM

Er=R_f+Bi(E(r_m)-R_f)

Er=5%+.65(7%-5%)

Er=5%+.65*2%

Er=6.3%