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IAI Actuarial Core Principles · Economic Modelling · Single and multifactor models for investment returns

Which of the following is a key difference between the APT and the CAPM?

APT allows several systematic risk factors and is derived from the absence of arbitrage, without specifying the factors. CAPM is an equilibrium model based on mean-variance investors in which the single market portfolio is the only systematic factor.

  1. AAPT requires all investors to hold the market portfolio, whereas CAPM does not
  2. BAPT allows several sources of systematic risk and relies on no-arbitrage, whereas CAPM relies on mean-variance investors and a single market factorCorrect
  3. CAPT assumes returns are normally distributed, whereas CAPM does not
  4. DAPT specifies exactly which factors must be included, whereas CAPM leaves them open
  5. APT can only be applied to a single security, whereas CAPM applies to portfolios

Explanation

CAPM is derived from mean-variance utility and equilibrium, giving one factor, the market portfolio. APT is derived from absence of arbitrage in a factor model, allows multiple factors, and does not specify what the factors are. The other options reverse or invent these features.

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