In the one factor (APT) model, the characteristic line to estimate bi 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 one factor (APT) model estimates beta by measuring the change in excess return on a security versus the return on the factor about its mean of zero. This means that the characteristic line passes through the origin because the factor has a mean of zero. Unlike the CAPM, which relates the actual return on a security to the market index, the APT model uses excess returns and a single factor other than the market to explain the returns on a security. Therefore, D is the best choice.

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