Microsoft PowerPoint - PoF.ppt

Motivationƒ 89

Problems associated with the CAPM

Ä

growing interest in

alternative valuation models!

ƒ

Most important alternative =

APT

; first introduced by Ross

(1976)

ƒ

Major advantages over the CAPM

ƒ

APT needs

no specific assumptions about the utility

functions

of the decision maker (investor); i.p. the APT requires

that bounds be placed on investors’ utility functions, but the bounds are less restrictive

ƒ

The

model can be tested empirically

Single-period random cash flows: Factor models - APT