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. Which are not assumptions of the Arbitrage Pricing model?
A) 1 and 3
B) 1, 2, and 3
C) 1, 2, and 5
D) 2, 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. Which are not assumptions of the Arbitrage Pricing model?
A) 1 and 3
B) 1, 2, and 3
C) 1, 2, and 5
D) 2, 4, and 6
E) All six are assumptions

Quizplus · Accepted Answer

The APT assumes normally distributed security returns, which is assumption 4. It also assumes a representation as a K factor model (5) and a mean-variance efficient market portfolio (6). However, it does not assume perfect competition in capital markets (1) or a quadratic utility function for investors (2). It does assume that investors prefer more wealth with certainty (3).

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