An important difference between CAPM and APT is A) CAPM depends on risk-return dominance; APT depends on a no-arbitrage condition. B) CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium. C) implications for prices derived from CAPM arguments are stronger than prices derived from APT arguments. D) Both CAPM depends on risk-return dominance; APT depends on a no-arbitrage condition and CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium. E) All of the options are true.

Question

Quizplus · Accepted Answer

Under the risk-return dominance argument of CAPM, when an equilibrium price is violated many investors will make small portfolio changes, depending on their risk tolerance, until equilibrium is restored. Under the no-arbitrage argument of APT, each investor will take as large a position as possible so only a few investors must act to restore equilibrium. Implications derived from APT are much stronger than those derived from CAPM.

An Important Difference Between CAPM and APT Is