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:
“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)
“Most parents aren’t even aware of how often they compare their children. . . . Comparisons carry the suggestion that specific conditions exist for parental love and acceptance. Thus, even when one child comes out on top in a comparison she is left feeling uneasy about the tenuousness of her position and the possibility of faring less well in the next comparison.”
—Marianne E. Neifert (20th century)
“... liberal intellectuals ... tend to have a classical theory of politics, in which the state has a monopoly of power; hoping that those in positions of authority may prove to be enlightened men, wielding power justly, they are natural, if cautious, allies of the “establishment.””
—Susan Sontag (b. 1933)