Difference Between CAPM and APT Essay Sample
- Pages: 2
- Word count: 490
- Rewriting Possibility: 99% (excellent)
- Category: stock
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Introduction of TOPIC
CAPM vs APT
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
CAPM vs APT
• 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.