Both the APT and the CAPM imply a positive relationship between expected return and risk. The APT views risk:
A) very similarly to the CAPM via the beta of the security.
B) in terms of individual intersecurity correlation versus the beta of the CAPM.
C) via the industry wide or marketwide factors creating correlation between securities.
D) as the standardized deviation of the covariance.
E) None of these.

Question

Quizplus · Accepted Answer

The APT views risk as the industry wide or marketwide factors creating correlation between securities, which is different from the CAPM that uses beta as a measure of systematic risk. The APT suggests that the expected return of a security should depend on multiple variables, such as inflation, economic growth, and interest rates, rather than just one variable like the CAPM. The APT implies that the more factor exposures a security has, the riskier it is, and the higher expected return it should have.

Both the APT and the CAPM Imply a Positive Relationship