Question

Which of the following would be required for tests of the multifactor CAPM and APT? A. Specification of risk factors B. Identification of portfolios that hedge these fundamental risk factors C. Tests of the explanatory power and risk premiums of the hedge portfolios D. All of the options are correct. E. None of the options are correct.

Answer 1

The answer is D) all of the options are correct

Step-by-step explanation:

Capital Asset Pricing Model CAPM allows investors to quantify the expected return on an investment given the investment risk, risk-free rate of return, expected market return, and the beta of an asset or portfolio.

Arbitrage Pricing Theory APT was developed on the basis that the prices of securities are driven by multiple factors, which could be grouped into macroeconomic or company-specific factors.

It serves as an alternative to the CAPM, and it uses fewer assumptions and may be harder to implement than the CAPM.

The following is required for tests of the multifactor CAPM and APT:

• Specification of risk factors
• Identification of portfolios that hedge these fundamental risk factors
• Tests of the explanatory power and risk premiums of the hedge portfolios