What are the difference and similarities between CAPM and APT?
Financial experts, shareholders and also for the investors must
always be aware of the returns to expect from the stocks in which
they invest. Many statistical models are available that are
comparable to different values ​​on that are based on the yearly
yield, so as to facilitate the investors to decide upon the values
​​in a more prudent manner. CAPM and APT are two such assessment
tools. Before we try to discover the differences between CAPM and
APT, let us take a closer look at both theories.
A a result of its ability to fairly assess the pricing of the
different stocks in the market, Arbitrage Pricing Theory or APT has
gained a lot of popularity among the investors. The fundamental
assumption of APT is that the value of a stock is determined by a
number of factors that include several macro factors as well as
those that are specific to a company. First there are macro factors
that are applicable to all companies and then there are the company
specific factors. The following equation is employed to find the
expected rate of return of a stock.
r= rf+ b1f1 + b2f2 + b3f3 + …..
Here r is the expected return on security, f is a number of
factors affecting the price of security and b is the measure of
relationship between security price and factor.
In an interesting way, the same formula is used to calculate the
rate of return in case of CAPM too, which is also known as the
Capital Asset Pricing Model. But, the difference is in the way a
single non-company factor and a single measure correlation are used
among price of asset and the factor in case of CAPM while there are
numerous aspects and diverse measures of relationships between
asset price and various factors in APT.
In APT, the performance of capital is to be considered
independent of the market and its price is assumed to be driven by
the company and non company specific factors. But, a disadvantage
of APT is that no test can discover these factors and in fact one
has to find empirically if factors of each company in which he is
interested in finding the binding price. More number of factors
identified, the more complicated becomes the task of finding
different measures of relationships with different factors as well.
These are the reasons why CAPM is preferred by investors as well as
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