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:
“From top to bottom of the ladder, greed is aroused without knowing where to find ultimate foothold. Nothing can calm it, since its goal is far beyond all it can attain. Reality seems valueless by comparison with the dreams of fevered imaginations; reality is therefore abandoned.”
—Emile Durkheim (1858–1917)
“What is man in nature? A nothing in comparison with the infinite, an all in comparison with the nothing—a mean between nothing and everything.”
—Blaise Pascal (1623–1662)
“Every theory is a self-fulfilling prophecy that orders experience into the framework it provides.”
—Ruth Hubbard (b. 1924)