I. CAPM (also called the capital asset pricing model) and APT (also called the arbitrage pricing model) have 3 differences:
1. The substance of the two is different:
(1) The substance of CAPM: mainly study the relationship between the expected return of assets and risky assets in the securities market, and how the equilibrium price is formed, is the modern financial market pillar of price theory.
(2) The essence of APT: The APT model suggests that the return on capital assets is the result of a combination of factors, such as the growth of GDP, the level of inflation and other factors, and is not only affected by the internal risk factors of the portfolio.
2, the origin of the two different:
(1) the origin of the CAPM: by the United States scholars Sharpe (William Sharpe), Lintner (John Lintner), Treynor (Jack Treynor) and Mossin (Jan Mossin) and others in 1964 in the asset portfolio theory and the theory of capital markets. developed on the basis of asset portfolio theory and capital market theory.
(2) The origin of APT: proposed by Ross in 1976, it is actually a model about capital asset pricing.
3, the two assumptions are different:
(1) CAPM assumptions: investors hope that the more wealth, the better, utility is a function of wealth, wealth is a function of the rate of return on investment, so it can be assumed that utility is a function of the rate of return. Investors can know in advance that the probability distribution of the rate of return on investment is normal. Investment risk is identified by the variance or standard deviation of the rate of return on investment. The two main factors affecting investment decisions are the expected rate of return and risk.
(2) The assumptions of APT: a single investment period; the absence of taxes; the ability of the investor to borrow freely at the risk-free rate; and the investor's choice of portfolio based on the mean and variance of the rate of return.
II. Link between CAPM and APT:
APT model is an alternative theory to CAPM model. Although called the arbitrage pricing model, but the actual arbitrage transactions have nothing to do with the valuation model for all assets, the theoretical basis is "the price of an asset is driven by different factors. Multiplying each of these factors by the beta of its effect on the asset price, summing them up and adding the risk-free rate of return, gives the value of the asset".
While the APT theory is perfect in form, it does not give specific factors driving asset prices, and these factors may be numerous, only by the investor's experience to choose their own judgment, and each factor has to calculate the corresponding beta value, the CAPM model only needs to calculate the value of a beta value, so in the practical application of the valuation of asset prices, the CAPM than the APT is used more widely. More widely used than APT.
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