# Apt vs Camp

**Topics:**Capital asset pricing model, Financial markets, Investment

**Pages:**5 (1423 words)

**Published:**May 8, 2013

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 next steps: to make short selling of a certain number of shares at the market where the shares are worth more, and buy the same number of shares at a another market, where the shares are cheaper. Such possibility, really, does occur. As the numbers of participants in the stock market are huge, there is little hope that this possibility no one else could notice - will notice and begin to use. However, the sudden increase in demand of one share is going to be expensive, and the price of another share will fall. In 1976, Stephen Ross stunned the world of finance with the arbitrage pricing theory. The arbitrage pricing theory is based upon the assumption that there are a few major macroeconomic factors that influence security returns. In other words the APT holds that: * The expected return from a security is a linear function of various factors affecting the returns from the securities in the market * These factors may be interest rate, inflation, currency rates, GDP growth, oil prices etc., each factor is represented by a factor is represented by a factor specific beta coefficient. Therefore, based on APT, the risky and profitable assets with the same extent should have the same cost. This model suggests the possibility of arbitration in the setup asset prices. (Bodie, 5th edition) Market investors seek to increase the portfolio return without increasing the risk. This possibility can be realized through the arbitration portfolio. This operation will allow the investor get a risk-free income. The attractiveness of using the arbitrage pricing theory is determined by its multifactor. In practice it is rarely possible to describe the movement of the market according to only one factor. The price of shares, and hence its earnings are affected by several factors. The choice of factors becomes purely subjective procedure and should be determined by the investor. That is why large institutional investors do not very widely use this theory in their practice. Despite...

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