Which of the following statements is true? a) It is possible that the Arbitrage Pricing Theory is Valid and the Capital Asset Pricing Model is not. b) It is possible that the Capital Asset Pricing Model is valid and the Arbitrage Pricing Theory is not.
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Which of the following statements is true?
a) It is possible that the Arbitrage Pricing Theory is Valid and the
b) It is possible that the Capital Asset Pricing Model is valid and the Arbitrage Pricing Theory is not.
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Solved in 3 steps
- What are the main criticisms of the Capital Asset Pricing Model (CAPM)? What does the empirical evidence suggests regarding the validity of CAPM? Provide detailed explanations and studies referring to each criticism.According to Capital Asset Pricing theory (CAPM), in a competitive marketplace: Group of answer choices A. only systematic risk is rewarded. B. only diversifiable risk is rewarded. C. all types of risks are rewarded. D. no risk is rewarded.The Capital Asset Pricing Model is usually adopted in a variety of circumstances but it does have some problems. Discuss with reference to actual cases.
- Is the Capital Asset Pricing Model now irrelevant given that other factors have been developed?In your view, what is the most important prediction of the Capital Asset Pricing Model? Among the assumptions made in the CAPM, which one do you think is the most unrealistic, and why?Which of the statements about the Arbitrage Pricing Theory MUST BE TRUE. I. There is only one systematic risk, the market risk. II. The market risk factor must be one of many systematic risk factors. III. Individual assets may have a positive or negative alpha A. I only B. II only C. III only D. None of the above
- What is an anomaly to an asset pricing model? For example explain what is pricing anomaly to CAPM associated with Book-to-market values.Capital Asset Pricing Model is based on certain assumptions, which have been criticized after empirical testing of the model. Discuss the critique of the model in the context of those assumption. Also discuss the empirical findings of the CAPM. What sort of models have been presented to overcome the drawbacks of CAPM?Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist? A. transaction costs. B. political risk. C. differential tax laws. D. all of the above. E. none of the above.
- The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for an individual security. Which is the relevant risk variable and why is it relevant? Why is the other risk variable not relevant?Both the capital asset pricing model and the arbitrage pricing theory rely on the proposition that a no-risk, no-wealth investment should earn, on average, no return. Explain why this should be the case, being sure to describe briefly the similarities and differences between the CAPM and the APT. Also, using either of these theories, explain how superior investment performance can be established.The general arbitrage pricing theory (APT) differs from thesingle-factor capital asset pricing model (CAPM) because theAPT: 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.