Compared to the CAPM, the APT has an advantage: the model adds factors until the unsystematic risk of any security is uncorrelated with the unsystematic risk of every other security.
A)As a result, unsystematic risk steadily falls as the number of securities in the portfolio
Increases.
B)systematic risks do not decrease as the number of securities in the portfolio increases.
C)A and B are both correct.
D)A and B are both incorrect.
E)Only B separates the APT from the CAPM.

Question

Quizplus · Accepted Answer

The APT (Arbitrage Pricing Theory) allows for multiple factors that can affect a security's return, beyond the single market factor in CAPM (Capital Asset Pricing Model). As more securities are added to a portfolio, the unsystematic (idiosyncratic) risk of each security can be diversified away, which aligns with choice A. However, systematic risk, which is inherent to the market as a whole, does not decrease with the addition of more securities, aligning with choice B. Therefore, both A and B are correct in highlighting the advantages and characteristics of the APT compared to the CAPM.

Compared to the CAPM, the APT Has an Advantage: the Model