Learning Outcome Statements

1. Arbitrage pricing theory

a. describe arbitrage pricing theory (APT), including its underlying assumptions and its relation to multifactor models;

b. define arbitrage opportunity and determine whether an arbitrage opportunity exists;

c. calculate the expected return on an asset given an asset's factor sensitivities and the factor risk premiums;

2. Factors and types of multifactor models

d. describe and compare macroeconomic factor models, fundamental factor models, and statistical factor models;

3. Multifactor models: selected applications

e. explain sources of active risk and interpret tracking risk and the information ratio;

f. describe uses of multifactor models and interpret the output of analyses based on multifactor models;

g. describe the potential benefits for investors in considering multiple risk dimensions when modeling asset returns.