Apt vs Camp
The comparison of underlying assumptions and conclusions of the CAPM and the APT models
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Prague, 2013 Introduction This paper studies the characteristics and application of valuation models of financial assets CAMP and APT. The methodology of measuring financial assets emerged in the second half of the 20th century, the most effective in practice, are now pricing model of financial assets as a CAPM and its subsequent conversion APT. With the pricing model of APT it is possible to make more complete and qualitative analysis of selected assets, considering the impact on the price of non-market factors. In the 1950s, Harry Markowitz developed the CAPM, or the Capital Asset Pricing Model. The point of this model is to demonstrate the close relationship between the rate of return on the risk of the financial instrument. The general idea of the APT
The APT, or the Arbitrage Pricing Theory was born as an alternative to CAPM. Many are not satisfied with the assumptions that are made in the model of the CAPM, and in 1976, Yale University professor Stephen Ross developed his theory, built only on arbitrage arguments.
In order to understand the APT, we have to know what is the arbitrage. Arbitrage – the exploitation of security mispricing in such a way that risk-free economic profits may be earned. (Bodie, 1999) The theory is based on one of the main statement – the arbitrage on the equilibrium market is impossible (the market "quickly eliminate" this opportunity).
The arbitrage pricing theory is based on a significantly smaller number of assumptions about the nature of the stock market than CAPM. The whole concept of arbitrage implies a guaranteed, risk-free profit from the game on the market. To understand the arbitrage concept, assume the situation, when the shares of one company are listed on a various trading platforms and the current market price of the same shares in the markets are different. Then the obvious
Prepared by:
Professor:
Prague, 2013 Introduction This paper studies the characteristics and application of valuation models of financial assets CAMP and APT. The methodology of measuring financial assets emerged in the second half of the 20th century, the most effective in practice, are now pricing model of financial assets as a CAPM and its subsequent conversion APT. With the pricing model of APT it is possible to make more complete and qualitative analysis of selected assets, considering the impact on the price of non-market factors. In the 1950s, Harry Markowitz developed the CAPM, or the Capital Asset Pricing Model. The point of this model is to demonstrate the close relationship between the rate of return on the risk of the financial instrument. The general idea of the APT
The APT, or the Arbitrage Pricing Theory was born as an alternative to CAPM. Many are not satisfied with the assumptions that are made in the model of the CAPM, and in 1976, Yale University professor Stephen Ross developed his theory, built only on arbitrage arguments.
In order to understand the APT, we have to know what is the arbitrage. Arbitrage – the exploitation of security mispricing in such a way that risk-free economic profits may be earned. (Bodie, 1999) The theory is based on one of the main statement – the arbitrage on the equilibrium market is impossible (the market "quickly eliminate" this opportunity).
The arbitrage pricing theory is based on a significantly smaller number of assumptions about the nature of the stock market than CAPM. The whole concept of arbitrage implies a guaranteed, risk-free profit from the game on the market. To understand the arbitrage concept, assume the situation, when the shares of one company are listed on a various trading platforms and the current market price of the same shares in the markets are different. Then the obvious
Cited: Bodie, K. M. 5th edition. Bodie, K. M. (1999). Investments.