Compare and contrast CAPM and APT?
Capital asset pricing model (CAPM) and arbitrage pricing theory (APT) are both methods of assessing an investment's risk in relation to its potential reward and whether the potential investment yield is worthwhile.

CAPM developed by Sharpe 1964. The basic theory behind this model is that investor needs to be compensated for Time Value of Money and the risk that they are taking.

The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk. This is calculated by taking a risk measure of the market (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf).

APT developed by Ross 1978. The basic theory of arbitrage pricing theory is the idea that the price of a security is driven by a number of factors such as macro factors, and company specific factors.

Formula:
r = rf + β1f1 + β2f2 + β3f3 + ⋅⋅

Where r is the expected return on the security,
rf is the risk free rate,
Each f is a separate factor and
each β is a measure of the relationship between the security price and that factor.

The CAPM bases the price of stock on the time value of money (risk-free rate of interest (rf)) and the stock's risk, or beta (b) and (rm) which is the overall stock market risk. APT does not regard market performance when it is calculated. Instead, it relates the expected return to fundamental factors. APT is more complicated to calculate compared to CAPM because more factors are involved. CAPM uses the formula: expected rate of return (r) = rf +b (rm - rf). The formula for APT is: expected return = rf + b1 (factor 1) + b2 (factor 2) + b3 (factor 3). APT uses a beta (b) for each particular factor regarding the sensitivity of the stock price.

...CAPITALASSETPRICINGMODEL
The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk [pic]premium. If this expected return does not meet or beat the required return, then the investment should not be undertaken. The security market line plots the results of the CAPM for all different risks (betas).
Using the CAPM model and the following assumptions, we can...

...
How far the CapitalAssetPricingModel has been successful in explaining asset returns, defining its approach and assumptions.
Semester 2013
Department of Accounting and Finance
Lord Ashcroft International Business School
Anglia Ruskin University
Table of Contents
Introduction…………………………………………………………………………......... 3...

...head: PRICINGMODELSPricingModels
Adam F. Thornton
FIN 501 – 3
TUI University
Dr. William Anderson
Chipotle Mexican Grill (CMG) is one of the fastest growing restaurant chains in the United States. Self proclaimed as “fast-casual,” CMG offers a dining experience that is unique, organic, and which draws from the local economy. For the investor, CMG is a wise investment for the aggressive and fast growing...

...investors. Explain your reasoning
Undiversifiable (market )risk:
Market risk is the variability in all risky assets caused by macroeconomic variables. This risk cannot be avoided, regardless of the amount of diversification. Systematic risk (Market risk) factors are those macroeconomic variables that affect the valuation of all risky assets such as variability in the growth of the money supply, interest rate volatility, variability in...

...CapitalAssetPricingModel
The CapitalAssetPricingModel otherwise know as CAPM defines the relationship between risk and return for individual securities. William Sharpe published the capitalassetpricingmodel in 1964. CAPM extended Harry Markowitz's portfolio theory to introduce the notions of...

...CapitalAssetPricingModel: The Indian Context
R Vaidyanathan
T
he CapitalAssetPricingmodel is based on two parameter portfolio analysis
model developed by Markowitz (1952). This model was simultaneously and
independently developed by John Lintner (1965), Jan Mossin (1966) and
William Sharpe...

...1.
In the context of the CapitalAssetPricingModel (CAPM) the relevant measure of risk is
A. unique risk.
B. beta.
C. standard deviation of returns.
D. variance of returns.
E. none of the above.
2.
In the context of the CapitalAssetPricingModel (CAPM) the relevant risk is
A. unique risk.
B. systematic risk.
C. standard deviation of returns.
D. variance of...

...Multifactor Models of Risk and Return. (QUESTIONS)
1. Both the capitalassetpricingmodel and the arbitragepricingtheory rely on the proposition that a no-risk, no-wealth investment should earn, on average, no return. Explain why this should be the case, being sure to describe briefly the similarities and differences between CAPM and APT. Also, using either of these...

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