Both the APT and the CAPM imply a positive relationship between expected return and risk. The APT views risk:
A) very similarly to the CAPM via the beta of the security.
B) in terms of individual inter-security correlation versus the beta of the CAPM.
C) via the industry wide or market-wide factors creating correlation between securities versus the CAPM beta.
D) the standardized deviation of the covariance.

Question

Quizplus · Accepted Answer

The Arbitrage Pricing Theory (APT) views risk through the lens of multiple factors that affect all securities to varying degrees, such as GDP growth or interest rates, which create correlations between securities. This is in contrast to the Capital Asset Pricing Model (CAPM), which considers risk primarily through a security's beta, or its sensitivity to movements in the overall market.

Both the APT and the CAPM Imply a Positive Relationship