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Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Table 7.2 Multifactor Models and CAPM
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Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7.5 Arbitrage Pricing Theory
Arbitrage
Relative mispricing creates riskless profit
Arbitrage Pricing Theory (APT)
Risk-return relationships from no-arbitrage considerations in large capital markets
Well-diversified portfolio
Nonsystematic risk is negligible
Arbitrage portfolio
Positive return
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Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Table 7.2 Multifactor Models and CAPM
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Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7.5 Arbitrage Pricing Theory
Arbitrage
Relative mispricing creates riskless profit
Arbitrage Pricing Theory (APT)
Risk-return relationships from no-arbitrage considerations in large capital markets
Well-diversified portfolio
Nonsystematic risk is negligible
Arbitrage portfolio
Positive return
you would reverse the signs of each portfolio weight to achieve a portfolio A with positive alpha and no net investment.
Steps to convert a well-diversified portfolio into an arbitrage portfolio:
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Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Figure 7.5 Security Characteristic Lines
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Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7.5 Arbitrage Pricing Theory
Multifactor Generalization of APT and CAPM
Factor portfolio
Well-diversified portfolio constructed to have beta of 1.0 on one factor and beta of zero on any other factor
Two-Factor Model for APT
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Table 7.9 Constructing an Arbitrage Portfolio
Constructing an arbitrage portfolio with two systemic factors
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Chapter 06 – Efficient Diversification
Chapter six
efficient diversification
In this chapter