The arbitrage pricing theory (APT)
A) considers only one factor and is a narrower model than the CAPM.
B) considers more factors than the CAPM and is a broader model.
C) is useful only for well-diversified portfolios of common stock.
D) is to practice because the factors are readily observable.

Question

Quizplus · Accepted Answer

APT considers multiple factors to explain asset returns, making it a broader model compared to the CAPM, which considers only one factor (systematic risk). Additionally, the factors used in APT may not be observable, making it difficult to apply in practice. A well-diversified portfolio is not a requirement for using APT.

The Arbitrage Pricing Theory (APT)