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Compare the assumptions underlying Arbitrage Pricing Theory with those underlying the mean-variance Capital Asset Pricing Model. Which set of assumptions seems more realistic to you? Why?

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Compare the assumptions underlying Arbitrage Pricing Theory with those underlying the mean-variance Capital Asset Pricing Model. Which set of assumptions seems more realistic to you? Why?

Answered Same Day Dec 25, 2021

Solution

Robert answered on Dec 25 2021
120 Votes
There are three Underlying Assumptions under the A
itrage Pricing Theory which are as below:
1. Asset returns under A
itrage Pricing Theory are explained by the systematic factors.
2. Under A
itrage Pricing Theory, investors can build portfolio of the assets in which
specific risk is eliminated through the diversification.
3. Also the a
itrage opportunity...
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