CFA Practice Question

There are 119 practice questions for this study session.

CFA Practice Question

The Arbitrage Pricing Theory (APT) assumes that ______.

I. capital markets are perfectly competitive.
II. investors always prefer more wealth to less wealth with certainty.
III. the utility function is quadratic in nature.
IV. the stochastic process generating asset returns can be represented as a K factor model.
V. security returns are normally distributed.
A. I, II and IV
B. I, II, III, IV and V
C. II, III, IV and V

User Contributed Comments 4

User Comment
broadex Why not V??
chris54321 broadex, the answer to your question is thus: because that is not one of the assumptions that APT makes. Hope this helps
b25331 recall that APT has only 3 assumptions….
dimitris13 Let me push back on that and say that Fama French said that in order for the market to be perfectly competitive there will be no opportunities for consistent excess returns. This means that returns follow a random process and are thus normally distributed. So if assumption 1 holds we also need to acccept the last one as I see it.
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