We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Difference Between CAPM and APT Essay Sample

  • Pages: 2
  • Word count: 490
  • Rewriting Possibility: 99% (excellent)
  • Category: stock

Get Full Essay

Get access to this section to get all help you need with your essay and educational issues.

Get Access

Introduction of TOPIC

For shareholders, investors and for financial experts, it is prudent to know the expected returns of a stock before investing. There are various statistical models that compare different stocks on the basis of their annualized yield to enable investors to choose stocks in a more careful manner. CAPM and APT are two such valuation tools. Before we try to find out the differences between APT and CAPM, let us take a closer look at the two theories. APT stands for Arbitrage Pricing Theory that has become very popular among investors because of its ability to make a fair assessment of pricing of different stocks. The basic assumption of APT is that the value of a stock is driven by a number of factors. First there are macro factors that are applicable to all companies and then there are company specific factors. The equation that is used to find the expected rate of return of a stock is as follows. r= rf+ b1f1 + b2f2 + b3f3 + …..

Here r i

s the expected return on security, f is different factors affecting the price of the security, and b

Sorry, but full essay samples are available only for registered users

Choose a Membership Plan
is the measure of relationship between the price of security and the factor. Interestingly, this is the same formula that is used to calculate the rate of return with CAPM, which stands for Capital Asset Pricing Model. However, the difference lies in the use of a single non company factor and a single measure of relationship between price of asset and the factor in the case of CAPM whereas there are many factors and also different measures of relationships between price of asset and different factors in APT. Another difference is that in APT, the performance of the asset is taken to be independent from the market and its price is assumed to be driven by non company and company specific factors. However, one drawback of APT is that there is no attempt to find out these factors, and in fact one has to himself find out empirically different factors in case of every company that he is interested in finding the pricing of. More the number of factors identified, the more complicated the task becomes as one has to find different measures of relationships of price with different factors also. These are the reasons why CAPM is being preferred over it by investors as well as financial experts. In brief:

• Similarities between APT and CAPM are that both make use of the same equation to find the rate of return of a security • However, whereas there are many assumptions made in APT, there are comparatively lesser assumptions in case of CAPM. • In APT, there are company specific risk factors and different betas for each factor have to be calculated individually empirically whereas there is no such requirement in case of CAPM.

We can write a custom essay on

Difference Between CAPM and APT Essay Sample ...
According to Your Specific Requirements.

Order an essay

You May Also Find These Documents Helpful

Barilla and JITD

In 1990 Barilla is the largest pasta manufacturer in the world. It manufactures 35% of all pasta sold in Italy, and 22% of all pasta sold in Europe. Barilla markets extensively through advertising and trade promotions for all of its divisions: pasta, bakery, fresh bread, catering, and international. In it’s product categories, Barilla has fresh and dry products. The dry products (dry pasta, dried toast, cookies etc.) are offered in about 800 different SKU’s. Pasta alone is made in 200 different shapes and sizes and is sold via 470 different SKU’s. Barilla caters to it’s consumers of pasta with three different pasta divisions (Barilla, Voiello, and Braibanti), each at a different price point. To make Barilla, the number one manufacturer of pasta Barilla employs massive state of the art factories that can not only produce mass quantities, but produce the variety of pasta to satisfy the world. In fact, just...

Analysis of Stock Ordering for Henley Ice...

1. What is the name of the organisation? Henley Ice Cream Parlour 2. What does it do? Sells ice cream to the general public at the shop. There are also tearooms at the shop. The ice cream is also supplied to local businesses for retail. 3. Where is it located? Henley-in-Arden 4. How many people does it employ? There are two full-time members of staff and 9 part-time. 5. How many shops are there? One 6. What are the names and positions held of people who are going to be involved with the project? Cindy Brittan - Owner Emily Brittan - Sales and Marketing Manager The specific area of the company that I will be looking at for the project is stock ordering. It is linked to the rest of the organisation as follows: As it is a very small company many of the departments overlap and are managed by...

The Sweet Stand

The Problem Recently a small "Young Enterprise" group has set up a Sweet Stand, which sells a variety of sweets and soft drinks. The staff working at this Sweet Stand are Dave Currall (The Manager), Natalia Gelder (Assistant Manager). At the moment, the records which hold the information, are all paper based. This problem requires for Dave Currall to keep records in order, and also wastes time in writing the information down for the records. A stock check takes a lot of time to do although Nature of the problem User's requirements 1. Stock checking forms. 2. Stock not re-ordered. 3. Wrong Minimum re-order quantities. 4. Don't know who supplies which item. 5. Takes time and is difficult to prepare orders. 1. Form to use for stock checking. 2. Automatically identify when stock is low. 3. Items have a re-order quantity. 4. Each item has its known supplier. 5. System...

Popular Essays


Emma Taylor


Hi there!
Would you like to get such a paper?
How about getting a customized one?