Unlike the capital asset pricing model, the arbitrage pricing theory requires only the following assumption(s):
A) a quadratic utility function.
B) normally distributed returns.
C) the stochastic process generating asset returns can be represented by a factor model.
D) a mean-variance efficient market portfolio consisting of all risky assets.
E) capital markets are imperfectly competitive.

Question

Quizplus · Accepted Answer

The arbitrage pricing theory requires only the assumption that the stochastic process generating asset returns can be represented by a factor model. This factor model represents the influence of various economic factors on asset prices. Unlike the capital asset pricing model, the arbitrage pricing theory does not require assumptions such as a quadratic utility function, normally distributed returns, a mean-variance efficient market portfolio, or imperfectly competitive capital markets.

Unlike the Capital Asset Pricing Model, the Arbitrage Pricing Theory