In the one factor (APT) model,the characteristic line to estimate β_i passes through the origin,unlike the estimate used in the CAPM because: A) the relationship is between the actual return on a security and the market index. B) the relationship measures the change in the security return over time versus the change in the market return. C) the relationship measures the change in excess return on a security versus GNP. D) the relationship measures the change in excess return on a security versus the return on the factor about its mean of zero. E) Cannot be determined without actual data.

Question

Quizplus · Accepted Answer

The characteristic line in the one factor APT model measures the change in excess return on a security versus the return on the single factor about its mean of zero. This is different from the CAPM, which measures the relationship between the actual return on a security and the market index. The fact that the line passes through the origin in the APT model reflects the assumption that the expected excess return on a security is proportional to its exposure to the single factor. Therefore, the line must pass through the zero point.

In the One Factor (APT) Model,the Characteristic Line to Estimate