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Nguyen Thuy
Nguyen Thuy
BusinessEconomy & Finance
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Investments Chapter 11: The Arbitrage Pricing Theory
Factor Risk Models ,[object Object],[object Object],[object Object],[object Object]
The Single Index Model ,[object Object],[object Object],[object Object]
The Single Index Model ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The Single Index Model ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
SIM versus Mean-Variance Efficient Set ,[object Object],[object Object],[object Object]
The Multiple Index Model ,[object Object],[object Object]
Example with 3 factors ,[object Object],[object Object],[object Object],[object Object]
Example ,[object Object],[object Object],[object Object],[object Object],[object Object]
Example ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Example ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Example ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Example ,[object Object],[object Object]
The Arbitrage Pricing Theory ,[object Object],[object Object],[object Object],[object Object]
Arbitrage Pricing Theory (True example) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Arbitrage Pricing Theory (True Example) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The Arbitrage Pricing Theory ,[object Object],[object Object]
The APT: Assumptions ,[object Object],[object Object],[object Object],[object Object],[object Object]
The Arbitrage Pricing Theory ,[object Object],[object Object]
Relationship Between the Return on the Common Factor & Excess Return Excess return The return on the factor F If F = 0, then  i > 0
Relationship Between the Return on the Common Factor & Excess Return Excess return The return on the factor F If we assume that there is no unsystematic risk, then  i = 0
Arbitrage Portfolios and Factor Models ,[object Object],[object Object],[object Object]
Arbitrage Portfolios and Factor Models ,[object Object]
Arbitrage Portfolios and Factor Models ,[object Object],In a large portfolio, the third row of this equation disappears as the unsystematic risk is diversified away. ,[object Object],[object Object],[object Object]
Arbitrage Portfolios and Factor Models ,[object Object],[object Object],[object Object],In a large portfolio, the only source of uncertainty is the portfolio’s sensitivity to the factor.
Arbitrage Portfolios and Factor Models ,[object Object]
APT vs. CAPM ,[object Object],[object Object],[object Object],[object Object]
Empirical Tests of the APT ,[object Object],[object Object],[object Object]

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L Pch11

  • 1. Investments Chapter 11: The Arbitrage Pricing Theory
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  • 20. Relationship Between the Return on the Common Factor & Excess Return Excess return The return on the factor F If F = 0, then  i > 0
  • 21. Relationship Between the Return on the Common Factor & Excess Return Excess return The return on the factor F If we assume that there is no unsystematic risk, then  i = 0
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Editor's Notes

  1. The unsystematic risk is diversified away because the variance of row three tends to 0 as N goes to infinity.