Question

The general arbitrage pricing theory (APT) differs from the single-factor capital asset pricingmodel (CAPM) because the APT________.a. Places more emphasis on market risk.b. Minimizes the importance of diversification.c. Recognizes multiple unsystematic risk factors.d. Recognizes multiple systematic risk factors.

Answer 1

Answer:

The correct answer is letter "D": multiple systematic risk factors.

Explanation:

The Arbitrage Pricing Theory or APT weights the influence of different macroeconomic factors on an asset return. If the asset's price is different than the model's projection an opportunistic investor can buy and sell the asset for a profit. Those macroeconomic factors can include economic output, unemployment, inflation, savings or investments-specific considerations and they capture systematic risk.