CFA® Level 1: CFA® Level 1 Exam - Arbitrage Pricing Theory (APT) and Capital Asset Pricing Model (CAPM)

False Statements about Arbitrage Pricing Theory (APT) and the Capital Asset Pricing Model (CAPM)

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Question

Which of the following statements about Arbitrage Pricing Theory (APT) and the Capital Asset Pricing Model (CAPM) is FALSE?

Answers

A. APT can equal CAPM.

B. In both the APT and the CAPM, the risk-free rate is added to a premium for risk factor (X) and the responsiveness of the asset's returns to factor (X).

C. If zero-investment arbitrage does not hold, the APT does not hold.

D. APT is a multi-factored model with restrictive assumptions. D

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Explanations

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A. B. C. D.

Explanation

Arbitrage Pricing Theory is a multifactored model with few limiting assumptions. More than one risk factor is able to influence security prices.

The other statements are true. Arbitrage Pricing Theory can equal the Capital Asset Pricing Model (CAPM) if there is only one risk factor "" market risk. Zero- investment arbitrage is an assumption of the APT. More specifically, zero-investment arbitrage means that if an investor buys an overpriced security, the investor has access to the short-sale money needed to buy an underpriced security.

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