Arbitrage Pricing Theory Essay

Arbitrage Pricing Theory APT (Arbitrage Pricing Theory) is a broad extension of CAPM, is an asset pricing model that explains the cross-sectional variation in asset returns. (Nai-FU Chen, 1983)

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Arbitrage is a modern efficient market (ie the market equilibrium price) formed a deciding factor. If the market does not reach equilibrium, it would exist on the market risk-free arbitrage opportunities. And by a number of factors to explain the risk assets, and in accordance with the no-arbitrage principle, the existence of (approximate) linear relationship between income and risk assets balance a number of factors. The front

It allows one to explain ( rather than statistical ) model of asset returns . It assumes that each investor will hold a unique combination of Tony in his own particular array , instead of the same " market portfolio has the potential to overcome the weaknesses of APT CAPM model : it requires less , and can be a simply produce more realistic assumptions arbitrage argument, it might be better explanatory power , because it is a multi-factor model , however , APT 's power and universality are the main advantages and disadvantages : the APT allows researchers to select any element provided for the best interpretation of the data , but it can not explain the variability of return on assets in terms of easily identifiable factors that limited number , on the contrary , the capital asset pricing model theory is intuitive and easy to use

Many investors do not know what it meant dividends, which may be a useful tool to help you figure it out. Another benefits of this method is that it is very simple. You do not have to do a lot of technical computing. You have a formula to calculate, and then you can continue your investment. (FinancialWeb)

Disadvantages

While this approach may be beneficial, but there are some drawbacks. The biggest problem is that dividends cannot be paid unless it is the value of a company. In current market, the vast majority of companies do not pay dividends regularly. Many companies opting instead to focus on growth and investment profits back into the company. According to this model, the company's stock is not worth anything. However, we know that many companies are very valuable and profitable.

Moreover, you have to make a lot of assumptions with this model. You will have to predict whether a company will continue to pay the same dividend, or if it will continue to pay dividends. If you guess wrong, the formula becomes worthless.(