Question

Which of the following is the major difference between the capital asset pricing model (CAPM) and
arbitrage pricing theory (APT)?
(A) CAPM uses a single systematic risk factor to explain an asset"s return whereas APT uses multiple systematic factors.
B) CAPM uses a single systematic risk factor to explain an asset"s return whereas APT uses multiple
systematic factors.
(C) APT uses a single systematic risk factor to explain an asset"s return whereas CAPM uses multiple
Which of the following is the major difference between the capital asset pricing model (CAPM) and
arbitrage pricing theory (APT)?
(A) CAPM uses a single systematic risk factor to explain an asset's return whereas APT uses multiple systematic factors.
(D)
Under CAPM, the beta coefficient of the risk-free rate of return is assumed to be higher than that of any
asset in the portfolio. Under APT, the beta coefficient of every asset in the portfolio is individually
compared to the beta of the risk-free rate

Answer 1

Answer:

Option c is correct one

Answer 2

The major difference between the capital asset pricing model (CAPM) and arbitrage pricing model (APT) is CAPM uses a single systematic risk factor to explain an asset's return whereas APT uses multiple systematic factors. (Option A is the correct answer).

• Stephen Ross created the arbitrage pricing theory (APT).
• The definition of systematic investment risk is where APT and CAPM fundamentally diverge.
• While APT takes into account a number of parameters that capture market-wide hazards, CAPM pushes for a single, market-wide risk factor. The APT leads to the CAPM in a single factor market context.
• By taking into account the risk, the risk-free rate of return, the anticipated market return, and the beta of an asset or portfolio, the CAPM enables investors to quantify the expected return on investment.
• An alternative to the CAPM that makes fewer assumptions and may be more challenging to apply is the arbitrage pricing theory.
• The CAPM, a one-factor model, is preferred by many investors over the more challenging APT, which needs users to quantify many aspects, even if both are effective.

Key differences between CAPM and APT:

• The CAPM and APT formulas appear to be identical at first glance, but the CAPM only includes one component and one beta.
• In contrast, the APT calculation requires the asset's beta in relation to each individual element because it contains numerous factors, including non-company factors.
• Users of the APT model must conduct analytical research to identify pertinent aspects that could have a bearing on an asset's returns because the APT does not offer any insight into what these factors might be.
• The difference between the projected market rate of return and the risk-free rate of return, on the other hand, is the factor employed in the CAPM.

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