Compare and contrast CAPM and APT

This essay is aim to compare and contrast the CAPM and APM . Both of these two model are equilibrium asset pricing model .To understand the similarities and differences between them , Firstly, we will derive and interpret CAPM and APM . Then compare them in different sides and rise the limitation of the CAPM . Finally , we will analysis whether and how the APM can avoid these problem .

“The Capital Asset Pricing Model is an equilibrium model of asset pricing, it states that the expected return on a security is a positive linear function of the security’s sensitivity to changes in the market portfolio’s return.”

To derive the CAPM, first we must assume away the complexities since the real world is sufficiently complex, and focus on the most important element .

1. “Investor evaluate portfolio by looking at the expected returns and standard deviations of the portfolios over a one-period horizon.”

2. “Investors are never satiated, so when given a choice between two portfolio with identical expected standard deviation, they

To derive the APM , we assume k source risk, then the return generating equation is :

R R

this equation is not need to be tested. It is true for any observed efficient portfolio, m, and orthogonal portfolio z. Then the test is to test whether the market portfolio is an efficient portfolio by the equation:

Then in the assumption term, the APT is more consummate and convenient than the CAPM. (1) (4)

Then the property of this portfolio can be written as:

Some topics in this essay:
CAPM APM, Pricing Model, Market Model, Rm Figure, Sharpe CAPM, CML SML, CAPM Roll’s, Equilibrium APM, Factor CAPM, Equilibrium CAPM, market portfolio, expected return, asset pricing, pricing model, capm apm, risk factor, equilibrium model, model equilibrium, model asset pricing, tangency portfolio, return portfolio, asset pricing model, equilibrium model asset, market moves equilibrium, capital asset pricing,