Exhibit 7-7
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S) (1) Capital markets are perfectly competitive.
(2) Quadratic utility function.
(3) Investors prefer more wealth to less wealth with certainty.
(4) Normally distributed security returns.
(5) Representation as a K factor model.
(6) A market portfolio that is mean-variance efficient.
-Refer to Exhibit 7-7 In the list above which are assumptions of the Arbitrage Pricing Model?
A) 1 and 4
B) 1, 2, and 3
C) 1, 3, and 5
D) 2, 3, 4, and 6
E) All six are assumptions

Question

Exhibit 7-7
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S) (1) Capital markets are perfectly competitive.
(2) Quadratic utility function.
(3) Investors prefer more wealth to less wealth with certainty.
(4) Normally distributed security returns.
(5) Representation as a  K  factor model.
(6) A market portfolio that is mean-variance efficient.
-Refer to Exhibit 7-7 In the list above which are assumptions of the Arbitrage Pricing Model?
A) 1 and 4
B) 1, 2, and 3
C) 1, 3, and 5
D) 2, 3, 4, and 6
E) All six are assumptions

Quizplus · Accepted Answer

The Arbitrage Pricing Model (APM) assumes perfectly competitive capital markets (1), investors prefer more wealth to less wealth with certainty (3), and representation as a K factor model (5). Therefore, options A, B, and D are incorrect because they include assumptions not related to APM, such as normally distributed security returns (4) and a mean-variance efficient market portfolio (6). Option E is incorrect because it includes all six assumptions, when only three are relevant to APM.

Exhibit 7-7 USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S) (1) Capital