Question

2. The feature of the general version of the arbitrage pricing theory (APT) that offers the greatest potential advantage over the simple CAPM is the: a. Identification of anticipated changes in production, inflation, and term structure of interest rates as key factors explaining the risk-return relationship b. Superior measurement of the risk-free rate of return over historical time periods c. Variability of coefficients of sensitivity to the APT factors for a given asset over time d. Use of several factors instead of a single market index to explain the risk-return relationship

Answer 1

Answer: Use of several factors instead of a single market index to explain the risk-return relationship

Explanation:

Arbitrage pricing theory (APT) is when the return on an asset is forecasted when the linear relationship which exist between the expected return of the asset and the macroeconomic variables are being considered.

Capital Asset Pricing Model (CAPM) helps in showing the relationship that take place between systematic risk and an asset expected return.

The feature of the general version of the arbitrage pricing theory (APT) that offers the greatest potential advantage over the simple CAPM is the use of several factors instead of a single market index to explain the risk-return relationship as it's more robust when compared to the CAPM.