- CFA Exams
- CFA Level I Exam
- Study Session 16. Portfolio Management (1)
- Reading 44. Using Multifactor Models
- Subject 1. Arbitrage pricing theory

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**CFA Practice Question**

The Arbitrage Pricing Theory (APT) assumes that ______.

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.

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

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**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. |