CFA Practice Question

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CFA Practice Question

Which statement(s) is (are) true about APT?

I. It uses the development of a security's price over time to calculate the expected return.
II. It uses risk premiums based on stock specific variables.
III. It uses key macroeconomic factors relevant to determine a security's returns.
IV. Investors are risk-averse.
A. I and III
B. III only
C. III and IV

User Contributed Comments 3

User Comment
tim2 hmm.. the LOS says the returns depend on the systematic risk - Seems to kind of assume investors are averse to risk
broadex It does not make such an assumption though.
SMcalister Assumptions of CAPM = Maximise economic utility, Investors are rational and risk-aver, Investors are broadly diversified and they are price takers.

Assumptions of APT = Capital Markets are perfectly competitive, Investors prefer more wealth to less with certainty and The process of generating asset returns can be expressed in a linear function of K risk factors.

Notice that the risk averse assumption is dropped for APT.
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