Arbitrage Pricing Theory and Multifactor Models
Free GARP FRM Part I lesson in Foundations of Risk Management. 18 min read, ~2,752 words.
APT assumes returns are driven by multiple factors and that arbitrage forces equilibrium pricing, no homogeneous expectations, no mean-variance preferences, no required market portfolio. APT vs. CAPM: APT is multi-factor and free of CAPM's restrictive assumptions; CAPM is a special case of APT with one factor (the market). Multifactor model...
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What this lesson covers
- Content
- Example 1
- Example 2
- Common Mistakes
- Key Takeaways
- Exam Shortcuts
Learning objectives
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