Comparison With Arbitrage Pricing Theory
The SML and CAPM are often contrasted with the arbitrage pricing theory (APT), which holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors, where sensitivity to changes in each factor is represented by a factor specific beta coefficient.
The APT is less restrictive in its assumptions: it allows for a statistical model of asset returns, and assumes that each investor will hold a unique portfolio with its own particular array of betas, as opposed to the identical "market portfolio". Unlike the CAPM, the APT, however, does not itself reveal the identity of its priced factors - the number and nature of these factors is likely to change over time and between economies.
Read more about this topic: Modern Portfolio Theory
Famous quotes containing the words comparison with, comparison and/or theory:
“Clay answered the petition by declaring that while he looked on the institution of slavery as an evil, it was ‘nothing in comparison with the far greater evil which would inevitably flow from a sudden and indiscriminate emancipation.’”
—State of Indiana, U.S. public relief program (1935-1943)
“It is very important not to become hard. The artist must always have one skin too few in comparison to other people, so you feel the slightest wind.”
—Shusha Guppy (b. 1938)
“Thus the theory of description matters most.
It is the theory of the word for those
For whom the word is the making of the world,
The buzzing world and lisping firmament.”
—Wallace Stevens (1879–1955)