In the one factor (APT)model,the characteristic line to estimate b_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

In the APT model, the characteristic line measures the change in excess return on a security versus the return on the factor about its mean of zero. This is different from the CAPM model, where the characteristic line measures the relationship between the actual return on a security and the market index. The APT model assumes that there are multiple factors that influence the return on a security, whereas the CAPM assumes that only the market factor is relevant. Due to this difference, the characteristic line in the APT model passes through the origin, while the CAPM model does not necessarily require it to do so.  Therefore, option D is the correct choice.

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

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