Arbitrage Pricing Theory
“The APT is derived from the premises that asset returns follow a linear returns generating process, and that in well-functioning financial markets, there will be no arbitrage opportunities. On the basis of these assumptions, one can show that there is an equilibrium linear relationship between the returns on risky assets and a small set of economy-wide common factors. While several macroeconomic variables do have some relationship with different risky assets, the APT postulates that the pricing of risky assets depends only on the set of variables whose influence is felt significantly by all risky assets together. This set of variables is known as the common factors of the APT.” (Otuteye 1998)
An arbitrage pricing theory is basically a theory that is copied from an issue model, using alteration or expansion and arbitrage arguments. This theory explains the joining amongst possible returns on securities, given that there are no occasions to create capital over risk-free arbitrage investments. The Capital Asset Pricing Model (CAPM) and the APT have developed as two models that have tried to exactly calculate the possible for assets to produce a profit or a loss. They are similar in that they try to calculate an asset's trend to track the overall market however APT tries to split market risk into lesser risks. Irrespective, it is very problematic to guess which organisations are strategically located properly into the upcoming future in the right rising markets.
Bodie describes CAPM as, “The capital asset pricing model is a set of predictions concerning equilibrium expected returns on risky assets. Harry Markowitz laid down the foundation of modern portfolio management in 1952. The CAPM was developed 12 years later in articles ………… The time for this gestation indicates that the leap from Markowitz’s portfolio selection model to the CAPM is not trivial.” (Bodie, 2011, p 308) The difference between CAPM and arbitrage pricing theory is that CAPM has a single
An arbitrage pricing theory is basically a theory that is copied from an issue model, using alteration or expansion and arbitrage arguments. This theory explains the joining amongst possible returns on securities, given that there are no occasions to create capital over risk-free arbitrage investments. The Capital Asset Pricing Model (CAPM) and the APT have developed as two models that have tried to exactly calculate the possible for assets to produce a profit or a loss. They are similar in that they try to calculate an asset's trend to track the overall market however APT tries to split market risk into lesser risks. Irrespective, it is very problematic to guess which organisations are strategically located properly into the upcoming future in the right rising markets.
Bodie describes CAPM as, “The capital asset pricing model is a set of predictions concerning equilibrium expected returns on risky assets. Harry Markowitz laid down the foundation of modern portfolio management in 1952. The CAPM was developed 12 years later in articles ………… The time for this gestation indicates that the leap from Markowitz’s portfolio selection model to the CAPM is not trivial.” (Bodie, 2011, p 308) The difference between CAPM and arbitrage pricing theory is that CAPM has a single