Which of the following would be required for tests of the multifactor CAPM and APT?
A) Specification of risk factors
B) Identification of portfolios that hedge these fundamental risk factors
C) Tests of the explanatory power and risk premiums of the hedge portfolios
D) All of the options are correct.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

Tests of the multifactor Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT) require the specification of risk factors, identification of portfolios that hedge these fundamental risk factors, and tests of the explanatory power and risk premiums of the hedge portfolios. These steps are essential for evaluating the models' effectiveness in explaining asset returns and the pricing of risk.

Which of the Following Would Be Required for Tests of the Multifactor