The general purpose of identifying multiple factors in the APT model is to:
A)identify the top three factors that have the largest impact on the market rate of return.
B)identify and eliminate all systematic risks from a portfolio.
C)identify the quantity of each factor that is needed to reduce a portfolio's risk,as measured by beta,to a level equal to that of the overall market.
D)reduce the unsystematic risk to a level where the unsystematic risk of one security is unrelated to the unsystematic risk of any other security.
E)reduce the slope of the security market line,thereby reducing portfolio risk.

Question

Quizplus · Accepted Answer

The APT model, or Arbitrage Pricing Theory, aims to explain asset prices by considering multiple risk factors. By identifying these factors, it allows for the diversification of unsystematic risk, which is specific to individual securities and can be reduced through diversification. The goal is not to eliminate all risk but to manage and diversify unsystematic risk across different securities, making the unsystematic risk of one security unrelated to that of another.

The General Purpose of Identifying Multiple Factors in the APT