BKM 10: APT and Multifactor Models of Risk and Return Flashcards
1
Q
Single-factor model of excess returns
A
2
Q
APT key propositions (3)
A
- Security returns can be described by a factor model
- There are sufficient securities to diversify away idiosyncratic risk
- Well-functioning security markets do not allow for persistence of arbitrage opportunities
3
Q
Law of One Price
A
If two assets are equivalent in all economically relevant aspects, they should have the same market price
4
Q
Risk-return dominance argument in support of equilibrium
A
When equilibrium relationship is violated, many investors will make limited portfolio changes
5
Q
Arbitrage argument in support of equilibrium price relationships
A
Each investor wants to take as large a position as possible
6
Q
Factor portfolio
A
Well-diversified portfolio constructed to have beta on one of the factors and beta of zero on any other factor
7
Q
Fama-French Three-Factor Model
A
8
Q
Advantage of APT over CAPM
A
Free of mean-variance optimizing assumption of CAPM
APT anchored by observable portfolios
