Arbitrage portfolio - factor model
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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 ?
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Solution Summary
The solution explains the differences between APT and CAPM. It also discusses arbitrage portfolio and factor sensitivity
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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 ...
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