In the One Factor (APT) Model, the characteristic line to estimate $\beta$i passes through the origin, unlike the estimate used in the CAPM because:
A) the relationship is between the actual return on a security and the market index.
B) the relationship measures the change in the security return over time versus the change in the market return.
C) the relationship measures the change in excess return on a security versus GNP.
D) the relationship measures the change in excess return on a security versus the change in the factor about its mean of zero.

Question

Quizplus · Accepted Answer

The One Factor (APT) Model focuses on the relationship between the change in excess return on a security and the change in a specific factor (not necessarily the market) about its mean of zero, which is why the characteristic line passes through the origin. This differs from the CAPM, which involves the market portfolio's excess return.

In the One Factor (APT) Model, the Characteristic Line to Estimate