The feature of the APT that offers the greatest potential advantage over the CAPM is the
A) use of several factors instead of a single market index to explain the risk-return relationship.
B) identification of anticipated changes in production, inflation, and term structure as key factors in explaining the risk-return relationship.
C) superior measurement of the risk-free rate of return over historical time periods.
D) variability of coefficients of sensitivity to the APT factors for a given asset over time.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

The Arbitrage Pricing Theory (APT) allows for multiple factors to explain the risk-return relationship, unlike the Capital Asset Pricing Model (CAPM) which relies on a single market index. This multi-factor approach is considered a significant advantage of APT over CAPM.

The Feature of the APT That Offers the Greatest Potential