While discussing arbitrage and the no-arbitrage pricing model, we learned that trading financial securities does not create wealth.

While discussing arbitrage and the no-arbitrage pricing model, we learned that trading financial securities does not create wealth. Yet, we can observe that there are professional day traders as well as high frequency trading firms and actively managed investment funds. If trading on its own does not create wealth, how do these market participants earn a profit? Is it possible that some trading does create wealth?

Expert Solution

Yes, Trading does possibly create wealth and it is evident from large investors who were traders before in their early life like Paul Tudor Jones or ray dalio.

They are depending upon technical analysisin order to analyse the trend of the market and they are trying to to study the price and volume patterns in order to determine the overall and descrepencies in the price and the expectation in which the prices going to go and they will be trying to take their position accordingly and make profits so there are not all traders who make profits but there are a small number of traders who do make profit and they are evident in the market because they are doing the technical analysis and they are trying to capitalise upon that.

Market is always a game of probabilities and if if there is a trader who is on the the positive side of the probability will be going to make money and if his estimation is going to get true then he is going to get successful in the market after application of the technical and the other behavioral tools.

jeff jeffy answered 2 years ago

2) Discuss the shortcomings of the capital asset pricing model. How does the arbitrage pricing model...

2) Discuss the shortcomings of the capital asset pricing model. How does the arbitrage pricing model address these shortcomings? Discuss the major shortcoming of the arbitrage pricing model? Explain which model is more useful in your opinion.

Critically evaluate the use of Arbitrage Pricing Theory (model) in asset pricing.

We learned that the ultimate goal of financial management is to maximize shareholders' wealth. Could this...

We learned that the ultimate goal of financial management is to maximize shareholders' wealth. Could this goal conflict with other goals, such as customer and employee safety, the environment and the general good of society? Should the firms take into consideration the well-being of the society in their effort to maximize shareholders' wealth? Try to think of some specific scenarios to illustrate your answer.

The arbitrage pricing model (APT) is a multi-risk factored asset pricing model that allows more than...

The arbitrage pricing model (APT) is a multi-risk factored asset pricing model that allows more than one risk factor to influence security prices”. In term of this statement, critically discuss the assumptions of the APT, its criticisms and its advantage over the CAPM. (In your answer provide a brief discussion on some of the common risk-factors used in APT).Subject is INVESTMENT

While the Capital Asset Pricing Model (CAPM) has been widely used to analyze securities and manage...

While the Capital Asset Pricing Model (CAPM) has been widely used to analyze securities and manage portfolios for the past 50 years, it has also been widely criticized as providing too simple a view of risk. Describe three problems in relation to the definition and estimation of the beta measure in the CAPM that would support this criticizm.

Describe an Arbitrage Pricing Theory (APT) model of your choice. How this model compares to the...

Describe an Arbitrage Pricing Theory (APT) model of your choice. How this model compares to the Capital Asset Pricing Model (CAPM)? ii) Support your answers with empirical evidence on how well models you discussed in part (i) can explain variability of returns

“The arbitrage pricing theory (APT) and capital asset pricing model(CAPM) are two major influential theories on...

“The arbitrage pricing theory (APT) and capital asset pricing model(CAPM) are two major influential theories on asset pricing. The APT differs from CAPM in that it is less restrict vein its assumptions. It allows for an explanatory (as opposed to statistical ) model of asset returns.” In terms of this quote, compare and contrast APT to CAPM. Your discussion should explain the assumptions,criticisms and advantages of each model as well as some of the common risk-factors uses in each model.

What is the exact difference between the single index model, arbitrage pricing model and linear regression...

What is the exact difference between the single index model, arbitrage pricing model and linear regression model? Based on the residual value's differentiation, will the single index model be included in the linear regression model rather than the arbitrage pricing model? Thanks.

Describe the underlying assumptions and differences for the Capital Asset Pricing Model (CAPM) and the Arbitrage...

Describe the underlying assumptions and differences for the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT). Provide an example in which type of situation each would be most appropriate to the task. Is there any situation in which using either method would be acceptable? Or neither, and if so, which pricing model would then be most appropriate? Explain.

The relevant risk for the fair market pricing of financial securities is the __________. . a....

The relevant risk for the fair market pricing of financial securities is the __________. . a. standard deviation of the investment’s return b. total risk c. systematic risk d. non-systematic risk

Question