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) All of the above

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. It does not make any assumptions regarding the utility function or the distribution of returns, and it does not require the existence of a mean-variance efficient market portfolio consisting of all risky assets, as in the capital asset pricing model.

Unlike the Capital Asset Pricing Model, the Arbitrage Pricing Theory