Arbitrage Pricing Theory (APT)

May 7th, 2015
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The APT model was developed as an alternative to the CAPM. Like the CAPM, this model provides implications for the relationship between expected returns and risk on securities. However, the model differs from CAPM in its assumptions, its implications, and in the way that equilibrium prices are reached.

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Arbitrage Pricing TheorySummary of the Arbitrage Pricing Theory (APT)The APT model was developed as an alternative to the CAPM. Like the CAPM, this model provides implications for the relationship between expected returns and risk on securities. However, the model differs from CAPM in its assumptions, its implications, and in the way that equilibrium prices are reached. Assumptions: The CAPM model assumes that all investors are risk-averse utility maximizers. In other words, all investors solve the investment problem in the way we described in portfolio theory (Lecture 3). The APT m

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