Which of the following comparisons of the Capital Asset Pricing Model (CAPM)and the Arbitrage Pricing Model (APT)is (are)true?
A)CAPM bases the expected return on an asset on one factor--the market portfolio; the APT bases the expected return on a number of economic factors.
B)CAPM is based on the theory that an asset's returns should compensate the investor for the risk of the investment. Risk is not factored into the APT.
C)While CAPM requires a number of estimates, the APT factors and their values are known with certainty.
D)All of the above statements are true.

Question

Quizplus · Accepted Answer

The first statement is true, as CAPM considers only one factor (market portfolio) while APT considers multiple economic factors. The second statement is false, as both CAPM and APT consider risk in their models. The third statement is false, as APT also requires estimates for its model. Option A is true. CAPM is based on the assumption that a portfolio's risk and return characteristics are determined only by the portfolio's exposure to the market risk factor, whereas APT assumes that asset returns are based on multiple factors. Option B is incorrect, as CAPM does incorporate the concept of risk through its beta coefficient. Option C is false, as the APT requires estimating the sensitivities of asset returns to various factors, just like CAPM.

Which of the Following Comparisons of the Capital Asset Pricing