Difference Between CAPM and APT
CAPM vs APT
For shareholders, investors and for financial experts, it is prudent to know the expected returns of a stock before investing. There are various statistical models that compare different stocks on the basis of their annualized yield to enable investors to choose stocks in a more careful manner. CAPM and APT are two such valuation tools. Before we try to find out the differences between APT and CAPM, let us take a closer look at the two theories. APT stands for Arbitrage Pricing Theory that has become very popular among investors because of its ability to make a fair assessment of pricing of different stocks. The basic assumption of APT is that the value of a stock is driven by a number of factors. First there are macro factors that are applicable to all companies and then there are company specific factors. The equation that is used to find the expected rate of return of a stock is as follows. r= rf+ b1f1 + b2f2 + b3f3 + …..

Here r is the expected return on security, f is different factors affecting the price of the security, and b is the measure of relationship between the price of security and the factor. Interestingly, this is the same formula that is used to calculate the rate of return with CAPM, which stands for Capital Asset Pricing Model. However, the difference lies in the use of a single non company factor and a single measure of relationship between price of asset and the factor in the case of CAPM whereas there are many factors and also different measures of relationships between price of asset and different factors in APT. Another difference is that in APT, the performance of the asset is taken to be independent from the market and its price is assumed to be driven by non company and company specific factors. However, one drawback of APT is that there is no attempt to find out these factors, and in fact one has to himself find out empirically different factors in case of every company that he is...

... but it
is assumed that the error terms are uncorrelated between assets, E(ei ej ) = 0, i = j.
If we form a portfolio of the n assets, deﬁned by the weights (α1 , . . . , αn ), then in
fact this portfolio is itself determined by a factor model, that is, the rate of return
r = n αi ri of the portfolio satisﬁes (2) with
i=1
n
αi ai
a =
i=1
n
bj =
αi bj,i
i=1
n
e =
αi ei .
i=1
1.2
Single-factor models: CAPM revisited
The simplest...

...
The Capital Asset Pricing Model commonly known as CAPM defines the relationship between risk and the return for individual securities. CAPM was first published by William Sharpe in 1964. CAPM extended “Harry Markowitz’s portfolio theory” to include the notions of specific and systematic risk. CAPM is a very useful tool that has enabled financial analysts or the independent investors to evaluate the risk of a specific...

...CAPMCAPM provides a framework for measuring the systematic risk of an individual security and relate it to the systematic risk of a well-diversified portfolio. The risk of individual securities is measured by β (beta). Thus, the equation for security market line (SML) is:
E(Rj) = Rf + [E(Rm) – Rf] βj
(Equation 1)
Where E(Rj) is the expected return on security j, Rf the risk-free rate of interest, Rm the expected return on the market portfolio and βj the...

...Yurop Shrestha
Economics Thesis
CAPM vs. APT: An Empirical Analysis
Introduction
The Capital Asset Pricing Model (CAPM), was first developed by William Sharpe (1964), and later extended and clarified by John Lintner (1965) and Fischer Black (1972). Four decades after the birth of this model, CAPM is still accepted as an appropriate technique for evaluating financial assets and retains an important place in both academic scholars...

...pricing model (CAPM)
Using the Capital Asset Pricing Model, we need to keep three things in mind. 1 there is a basic reward for waiting, the risk free rate. 2 the greater the risk, the greater the expected reward. 3 there is a consisted trade off between risk and reward.
In finance, It is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's...

...Is CAPM Beta Dead or Alive? Depends on How you Measure It
Jiri Novak*
* Uppsala University, Sweden E-mail: jiri.novak@fek.uu.se October 2007 Abstract: The CAPM beta is arguably the most common risk factor used in estimating expected stock returns. Despite of its popularity several past studies documented weak (if any) association betweenCAPM beta and realized stock returns, which led several researchers to proclaim beta “dead”. This...

...Pricing Model (CAPM) and Arbitrage Pricing Theory (APT), to explain the excess return of a portfolio of stocks in Saudi Stock Exchange (TADAWUL). The regression analyses were conducted on the portfolio, which consists of 54 listed and actively traded stocks in TADAWUL. Comprising the ex-ante sample from the period of January 2000 and December 2005 and the ex-post sample from the period of January 2006 and December 2008, this study shows that none of the conditions...

...estimated to testify that the CAPM works in practice.
The capital asset pricing model (CAPM) provides us with an insight into the relationship between the risk of an asset and its expected return. This relationship serves two significant functions. First, it provides a benchmark rate of return for evaluating possible investments. Second, the model helps us to make an educated guess as to the expected return on asset that have not yet been traded in...

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