Compare the APT with the CAPM

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ANS:

Arbitrage pricing theory is a multi-factor pricing model. This theory was proposed by the economist Stephen Ross in 1976. This helps to predict the assets return by establishing the relationship between the assets expected return & systematic risk.

CAPM describes the relationship between systematic risk & expected return for assets. CAPM is used to calculate the cost of equity by using formula as Rf + Beta (Rm - Rf ).It gives an idea to the investors about their scope of investment & enable them to derive value for money.

Comparison - CAPM uses single factor & one Beta, whereas has a multi-factor which doesnot include the CAPM beta. Furthermore, APT doesnot indicate the identity or number of risk factors while the CAPM requires the expected market return.

APT is more accurate than CAPM is CAPM uses Single factor & single Beta whereas APT uses factor intensity structure.

jeff jeffy answered 2 years ago

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