1) In what significant does the APT differ from CAPM ?
2) Why would an investor wish to form an arbitrage portfolio ?
3) What three conditions define an arbitrage portfolio ?
4. Assuming a one-factor model, consider a portfolio composed of three securities with the following factor sensitivities:
Security --- Factor Sensitivity
1 -- 0.90
2 -- 3.00
3 -- 1.80
If the proportion of security 1 on the portfolio is increased by .2 how must the proportions of the other two securities change if the portfolio is to maintain the same factor sensitivity ?
Solution Preview
See attached file.
1) In what significant does the APT differ from CAPM ?
a APT makes lesser number of assumptions than CAPM. In some ways is less complicated than CAPM.
b The market portfolio that is central to CAPM does not feature in APM.
c APT does not tell what the underlying factors are unlike CAPM which relates the return on the asset/portfolio of assets
on a single factor (the return on the market portfolio).
2) Why would an investor wish to form an arbitrage portfolio ?
An investor wishes to form an arbitrage portfolio to increase ...
Solution Summary
The solution explains the differences between APT and CAPM. It also discusses arbitrage portfolio and factor sensitivity
... The risk premiums on the factor 1 and factor 2 portfolios are 4 ... to APT, what is the expected return on your portfolio if no arbitrage opportunities exist? ...
... to asset pricing is called the Arbitrage Pricing Theory ... is a useful tool for building portfolios adapted to ... wanted to create a pension fund portfolio that was ...
... assumes that: (i) There is no arbitrage opportunity in ... and then divided into two portfolio one consisting ... Return on big asset portfolios subtracted from the ...
... the variance of return of three portfolios containing an ... will emerge such that no arbitrage opportunities exist ... C)] stock and debt and on the market portfolio. ...
... free rate and return on market portfolio is also ... the expected rate of return and factor structure should ... According to the arbitrage pricing model the expected ...
... between the security price and that factor." Hence for arbitrage pricing theory ... Risk and return, portfolio diversification and the Capital Asset Pricing ...
... The optimal portfolio includes the risk-free asset (when ... explained earlier in the questions, when deriving optimal portfolios. ... E. Arbitrage Pricing Theory (APT ...
... each of these four factors could affect portfolio returns. ... understand first of all about the Arbitrage pricing theory ... rate, Each f is a separate factor and each ...
... a choice between two otherwise identical portfolios they will ... stock returns according to Arbitrage Pricing Theory ... of an individual investment or a portfolio. ...
... excess) expected rate of return on the market portfolio: ... between the security price and that factor." Hence for ... As per my judgement arbitrage pricing theory is ...
