Arbitrate pricing theory is an _______ model.
(A) asset pricing
(B) risk evaluation
(C) bond pricing
(D) none
Answers
Answer:
Bond pricing
hope it helps
The correct option for the blank is (A) asset pricing.
Arbitrage pricing theory (APT) is a multi-factor asset pricing model that relates the price of any asset to its expected return and several macroeconomic (systematic) risk factors.
Arbitrage pricing theory is a way of estimating the expected return and price of an asset based on its exposure to different sources of risk. It assumes that there are arbitrage opportunities in the market that can be exploited by investors who can buy and sell assets at different prices. It also assumes that the asset’s return is a linear function of its risk factors and their premiums. The formula for arbitrage pricing theory is:
E(Ri) = E(Rz) + (E(I) - E(Rz)) x βn
where:
- E(Ri) = Expected return on the asset
- E(Rz) = Risk-free rate of return
- E(I) = Risk premium associated with factor i
- βn = Sensitivity of the asset price to factor n
The risk factors can be any macroeconomic variables that affect the asset’s price, such as inflation, GDP, interest rates, etc. The number and choice of factors can vary depending on the investor’s preferences and data availability. The beta coefficients measure how much the asset’s price changes when the factor changes by one unit. They can be estimated by using linear regression on historical data.
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