The most serious drawback of the arbitrage pricing model is
A) the requirement of a negative market risk premium.
B) its inability of identifying important factors.
C) its reliance on a market index.
D) the disequilibrium assumption.
E) none of the above

Question

Quizplus · Accepted Answer

The most serious drawback of the arbitrage pricing model is its inability to identify important factors. While it is a useful tool for determining the fair value of an asset based on its exposure to a set of risk factors, it cannot tell us which factors are most important in determining that value. This makes it difficult to use in practice, particularly when dealing with complex financial instruments or markets with many variables. The other choices are not accurate as the model does not require a negative market risk premium, it relies on multiple factors not just a market index, and the disequilibrium assumption is a standard assumption made in financial modeling.

The Most Serious Drawback of the Arbitrage Pricing Model Is