A.05.BKM Ch 10

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Author:
Exam9_2012
ID:
134781
Filename:
A.05.BKM Ch 10
Updated:
2012-05-09 14:38:41
Tags:
APT
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Description:
Arbitrage Pricing Theory
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  1. Multifactor model
    • use factor pf to derive Rj
    • factors should (1) have considerable ability to explain security returns (2) be important risk factors for which investors would demand risk premium (inflation, GDP)
  2. Arbitrage
    • Opportunity to earn a riskless profit w/o need to make a net investment
    • Law of one price: 2 assets equivalent in all economically relevant aspects should have the same mkt price
  3. APT assumptions
    • security returns can be described by a factor model
    • sufficient # of securities to diversify away idiosyncratic risk
    • well functioning securities mkt do not allow for persistence of arbitrage
  4. APT vs CAPM
    • APT has less restrictions
    • APT applies to diversified pfs
    • CAPM applies to all securities (advantage)
  5. Arguments for Equilibrium
    • Risk return dominance: many investors make limited chg to pf
    • Arbitrage: few investors maximize position to maximize profit

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