1. Compare and contrast CAPM and APT
... the SML below the CML. (1) (4) APM: The arbitrage pricing model is an equilibrium model of asset pricing . It states that the expected return on a security is a linear function of the security's sensitivity to various common factors. This model does not require the assumption that investor evaluate the portfolio on the basis of means-variance. Assumption: 1. Investors will seize the opportunity, which ... opportunities. However, these assumption also a restriction of CAPM since the critical assumption of mean-variance are violated, say the normally distributed return and the quadratic ut...
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