60 Frequently Asked Questions In Quantitative Finance
- a default spread on corporate bonds
- an exchange rate
Statistical variables come from an analysis of a covari-
ance of asset returns. From this one extracts the factors
by some suitable decomposition.
The main differences between CAPM and APT is that
CAPM is based on equilibrium arguments to get to the
concept of theMarket Portfoliowhereas APT is based
on a simple approximate arbitrage argument. Although
APT talks about arbitrage, this must be contrasted with
the arbitrage arguments we see in spot versus forward
and in option pricing. These are genuine exact arbi-
trages (albeit the latter being model dependent). In APT
the arbitrage is only approximate.
References and Further Reading
Ross, S 1976 The Arbitrage Theory of Capital Asset Pricing.J.
of Economic Theory 13 341–360
