FINA 385 Lecture Notes - Lecture 7: Arbitrage Pricing Theory, Arbitrage, Capital Asset Pricing Model
14 Dec 2017
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Document Summary
Factor models and arbitrage pricing theory: introduction, capm prices securities by using a general equilibrium approach, securities can also be priced using the condition of absence of arbitrage in an e cient market (the no arbitrage approach) Arbitrage is a strategy that brings a riskless pro t at zero cost: no arbitrage approach is used in arbitrage pricing theory (apt, the apt does not require very strong assumptions like the capm does. N estimates of expected returns, n estimates of variances and, n(n - 1)/2 estimates of covariances. 58: assume that beyond the common movements due to macroeconomic indicator all the uncertainty in stock returns is rm-speci c, we recognize that di erent rms have di erent sensitivities to macroeconomic events. Composite index; then equation (4-1) is called a single index model: a single index model is often written as following. = i + rf + i(rm rf ) + ei.
