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1. What are the main assumptions and conclusions of the Arbitrage Pricing Model (APT)?
How might you estimate the APT factor premium associated with each factor? Compare
and describe two methods carefully. Why might the more sophisticated method work
better?
APT Assumptions
Arbitrage pricing theory (APT), advanced by economist Stephen Rossis an
alternative option to the capital asset pricing model (CAPM). Arbitrage pricing theory
has gained relevance due to its relatively simpler assumptions. First, one of the core
assumptions in APT is that markets, in some cases, misprice securities before the market
rectifies such, then, accompanied by securities move back to fair value. The second
assumption is that asset's returns are predictable, which is established by deploying the
linear relationship between the asset’s expected return and several macroeconomic
variables that capture systematic risk. Third, APT assumes that markets are perfectly
efficient. Finally, no arbitrage opportunities exist.
Estimation of the APT factor premium associated with each factor
When calculating premium, APT analyzes macroeconomic factors that determine
risk and returns in specific assets. According to systematic risks, the premium paid by
investors for each factor can be calculated because such risk cannot be eliminated.
Investors will choose the specific profile of risks based on premiums and the nature of
macroeconomic risks.
Compare two methods

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Why might the more sophisticated method work better?
APT and CAPM are both asset pricing models. However, APT is more flexible and
complex than the CAPM. The difference emerges from the fact that the CAPM only
considers market risk as a factor while APT considers multiple risk factors. Thus, APT
works better because it considers realistic systematic risks that the CAPM model could
not capture.
2. What are the differences among leading, coincident, lagging economic indicators? Pick
one example (not composite indicator) for each of leading, coincident, lagging (three
examples in total) and discuss why it is leading, coincident, or lagging.
Leading indicators point toward future events, lagging indicators confirm a pattern that is
in progress, and coincident indicators happen in real-time and clarify the precise situation
of the economy. An example of a leading indicator in the market is the production of new
drugs, which at the start is characterized by increasing sales, but as time goes, the market
gets saturated, thereby resulting in reduce markets. Organization, corporate, or business
profits are an example of lagging indicators. Continually dwindling corporate profits or
incomes can illustrate a poorly performing economy. Finally, coincident indicators depict
the real situation or status of the economy. For instance, the average wages, current
employment rates, or gross domestic product are a manifestation of the economy's current
status or well-being.
3. What are the similarities and differences among global minimum variance (GMV), risk
parity (RP), and low beta portfolios? Why might these portfolios outperform (as
measured by Sharpe ratio) when they clearly do not have the maximal Sharpe Ratio in
theory? Why might be some of the reasons for an investment consultant to not
recommend these portfolios constructed from US equities given their seemingly superb
performance characteristics when compared to the S&P 500?
The Global Minimum Variance (GMV) refers to the portfolio with less risk, Risk
parity (RP) is a risk-based portfolio method, and a beta value means that the
security is theoretically less volatile than the market. The performance beta

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1. What are the main assumptions and conclusions of the Arbitrage Pricing Model (APT)? How might you estimate the APT factor premium associated with each factor? Compare and describe two methods carefully. Why might the more sophisticated method work better? APT Assumptions Arbitrage pricing theory (APT), advanced by economist Stephen Rossis an alternative option to the capital asset pricing model (CAPM). Arbitrage pricing theory has gained relevance due to its relatively simpler assumptions. First, one of the core assumptions in APT is that markets, in some cases, misprice securities before the market rectifies such, then, accompanied by securities move back to fair value. The second assumption is that asset's returns are predictable, which is established by deploying the linear relationship between the asset’s expected return and several macroeconomic variables that capture systematic risk. Third, APT assumes that markets are perfectly efficient. Finally, no arbitrage opportunities exist. Estimation of the APT factor premium associated with each factor When calculating premium, APT analyzes macroeconomic factors that determine risk and returns in specific assets. According to systematic risks, the premium paid by investors for each factor can be calculated because such risk cannot be eliminated. Investors will choose the specific profile of risks based on premiums and the nature of macroeconomic risks. Compare two methods Why might the more sophisticated method work bet ...
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