Microsoft PowerPoint - PoF.ppt

Important factsƒ 94

Given factor prices s.t. there exis

t a linear relationship between the

betas with reference to the market po

rtfolio and expected rates of return

Ä

CAPM and APT are completely consistent

(BUT CAPM is not a

special case of the APT, since

the CAPM assumes nothing about the

structure of security returns other th

an that possibly they are normal

distributed. Normal distributions, however, do not necessarily imply the linear factor structure required by the APT).

ƒ

The APT is completely silent with re

spect to what the factors stand for!

ƒ

Chen, Roll, Ross (1986):

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Inflation

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Industrial production

ƒ

Risk premiums

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Term structures

Single-period random cash flows: Factor models - APT