Final answer:
The arbitrage pricing theory's main problem is the failure to specify key macroeconomic variables influencing the risk-return relationship. It attempts to reflect market complexities but lacks clear guidance on which factors to consider, contrasting with other models. Therefore correct option is D
Step-by-step explanation:
One of the main problems with the arbitrage pricing theory (APT) is d) the model fails to identify the key macroeconomic variables in the risk-return relationship. Arbitrage pricing theory suggests that the return on a portfolio or stock is influenced by multiple macroeconomic factors, but it does not specify which factors are impacting the risk-return relationship. In contrast, other models, like the Capital Asset Pricing Model (CAPM), incorporate specific risk factors like the market beta. APT's reliance on multiple factors is an attempt to offer a more flexible and potentially more accurate reflection of reality, but this flexibility is also its weakest point because it becomes complex and leaves investors to determine which factors are relevant.
When analyzing market factors, economists have to consider real-world complexities that may not align with theoretical models. Perfect competition is a benchmark used for comparison with real-world problems, but it assumes away practical issues like technology changes, government intervention, and information imperfections. These elements must be taken into account to understand the practical application of theories like APT and how they compare to the actual performance of markets.