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Futures contracts and options on futures contracts can be used to modify risk.
Required:
Identify the fundamental distinction between a futures contract and an option on a...
Answers
Conceptual differences between Arbitrage Pricing Theory and CAPM.
In APT, return is a function of a set of common factors while in CAPM, return is a function of
a market portfolio of risky assets.
APT is a multi-factor model that attempts to capture several non-markets influences that cause
securities or assets to change in prices. CAPM on the other hand, is a single index model that
assume securities or assets change in price because of a common co-movement with one market
portfolio of all risky assets.
In application of the theory, the market portfolio or factor required by CAPM is specified. In APT,
the common factors are not identified.
APT incorporates a number of sensitivity coefficients. These coefficients determine how each
independent variable or macro-economic factor affects each asset. Different assets are affected to
different degrees or extents by common factors.
In CPAM, the only sensitivity factor is beta (Systematic risk).
CAPM is a single period model. APT can be extended to multi-period framework
Kavungya answered the question on April 16, 2021 at 14:11
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