Arbitrage Pricing Theory - Essay Example

Extract of sample
Arbitrage Pricing Theory

To be able to show the problems, I make use of the study done by Lehman and Modest (1985), which come up into three conclusions. The analysis of Lehman and Modest was able to show that one of the problems in determining the factor for asset pricing is the proper or the correct use of procedure. Lehman and Modest opposed Fama-Macbeth in using the maximum likelihood analysis in determining the factors. Another study included in this paper is the one done by Enrico Altay (2003) using the Germany and Turkish stock exchange. In his study he uses the Fama-Macbeth maximum likelihood analysis. This causes the difference in the result.
Therefore, in analysing the stock exchange one should be aware of the models and theory being used. The arbitrage pricing theory may encounter several problems especially in analyzing the factors. The macroeconomic factors may affect the outcome in pricing the asset. The analysis in which the best portfolio perform best remains. The arguments are presented in the later part of the paper.
Arbitrage Pricing Theory (APT), is a general theory of asset pricing. It holds the expected return of a financial asset that can be modelled as a linear function of various macro-economic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor specific beta coefficient. This theory was initiated by the economist Stephen Ross in 1976.
The ...Show more

Summary

This paper is an analysis of the Arbitrage Pricing Theory (APT) of Ross (1976). The paper includes the determination of the problems that exist during the selection of the factors in asset pricing. Arbitrage Pricing Theory was developed by Ross in 1976, the start of a great change in the market industry…
Author : hermannclare
Arbitrage Pricing Theory essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Arbitrage Pricing Theory"
with a personal 20% discount.
Grab the best paper

Related Essays

Financial Economics
The equation, which determines this relationship, is presented as: E(Ri) = RF + ?i [E(RM) - RF] (Giovanis, 2010) The CAPM model is based on various assumptions, which in turn have implications on the application of the model in the actual scenarios. By assuming that investors in general tend to avoid risk and prefer such investment opportunities only by considering the returns associated with them together with the variations in the returns related to assets.
4 pages (1000 words) Essay
Capital asset pricing model
The model assumes that the lending rate and the borrowing rate are equal. In practice, these two rates differ and therefore, the model will not hold in a real life scenario. also Also it assumes that there is no transaction cost, taxes or holding period of the securities.
4 pages (1000 words) Essay
The Capital Asset Pricing Model
It is essentially used to price the most risky assets. As a mathematical model for equilibrium in financial markets and portfolio theory (Markowitz), the CAPM core basis is the relationship that exists between the risk of a security and its yield, and it is measured through a single beta factor for risk (Plesmann, 2010.p.54).
4 pages (1000 words) Essay
Business Finance, Computational and mini essay question
Curtain plc has a beta factor of 0.6 and has a correlation coefficient with the market portfolio of 0.27, whilst Blind plc has a beta factor of 1.4 and a correlation coefficient with the market portfolio of 0.21. The correlation coefficient between Curtain plc and Blind plc is 0.32.
2 pages (500 words) Essay
Capital Asset Pricing Model (CAPM) Vs. Arbitrage Pricing Theory (APT)
According to the CAPM, the relation between the expected return on a given asset i, and the expected return on a proxy market portfolio m is given as: APT holds that the expected return of a financial asset can be modelled as a linear function of various macro-economic factors, where sensitivity to changes in each factor is represented by a factor specific beta coefficient.
5 pages (1250 words) Essay
Portfolio Theory
In terms of return on investment, Portfolio 3 would be the better choice; it is expected to deliver a 31.60%-return rate, while Portfolio 2 is expected to deliver 29.20%. Meanwhile, the following computations serve to arrive at the risk rates (standard deviation) of the portfolios:
7 pages (1750 words) Essay
CORPORATE FINANCE CASE ASSIGNMEN 3 Risk and return, portfolio diversification and the Capital Asset Pricing Model; The cost of equity
The investment decision is really a two-pronged question: ‘What is the Potential Income?’ and ‘How risky is the venture?’ (Silbiger). High returns are not the only deciding factor
5 pages (1250 words) Essay
Risk and return, portfolio diversification and the Capital Asset Pricing Model; The cost of equity (Starbucks Co.)
Capital asset pricing model is one of the leading models for calculating cost of equity by taking into consideration the concept of risk and return. It takes into account the risk free rate of return as well as market risk premium along with beta to
2 pages (500 words) Essay
Asset pricing models (CAPM and APT)
It should be kept in mind that the information should be free of risk factors (Altwies & Reynolds, 2010). Risk rate of the asset is determined in the market. It consists of an average rate of risk calculated by the investors in the market who are acquiring
4 pages (1000 words) Essay
Explain the limitations of the Capital Asset Pricing Model and the extent to which the multi-factors approach has overcome these limitations
Here Beta represents that the shares with high beta value will increase the return. The efficient frontier is mainly used in CAPM model as it helps in estimating the risk and
11 pages (2750 words) Essay
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT