Difference Between CAPM And The Arbitrage Pricing Model

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To understand the issues in this essay, it is important to know what is the Capital Assets Pricing Model (CAPM) and the Arbitrage Pricing Model (APT).
According to the publications of Sharpe (1964), Lintner (1965) and Mossin (1966) the CAPM is a basic model of pricing of capital assets, the model offers a set of predictions about an equilibrium of expected return on risky assets. CAPM is one of the basic pillar of financial economy.
The CAPM offers a set of predictions concerning about how to measure risk and the relation among an expected return and a risk. Another applications of CAPM is to evaluate the performance of managed portfolios and to estimate the cost of capital in the companies (Fama, French, 2004).
As highlighted by Lucy (7777)
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The fact that investors care only about the mean-variance efficient portfolio, planning in single period, and its distribution is unreal, as the asset’s risk, future investments opportunities are considered as well. The main aspect of that model is to explain the investors a wealth the portfolio should produce and define the period to the investors, where all of them holds identical …show more content…
As highlighted by Betka (9999), the assumptions of APT are not as restrictive as in the CAPM market portfolio, on the other hand the APT does not guarantee an equal relationship for all securities at all times.
This view is supported by Burmeister, Roll and Ross (2003) which states that CAPM and APT can both influence the return on any individual stock thought various firm-specific risks and forces. On the contrary the systematic risk of APT is not only depending on exposure to the overall market and its stock market index, the APT represents the view where not necessarily the systematic risk is measured in the single way, the APT is general and it is not required to specify exactly what the systematic risk is. On the other hand, by using CAPM, as argues by Betka (9999) a risk premium on a risky assets is corresponding equivalently to the beta, which is used as a measurement of the systematic risk of the portfolio compared with the market as a whole. Ultimately, the beta reflects a systematic

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