CFA Practice Question

There are 119 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to the comparison drawn between the arbitrage pricing model and the CAPM?

I. Both models assert that there is a linear relationship between risk and return.
II. Both models define equilibrium as a state where all securities have the same reward to risk ratio.
III. The fundamental factors for the APT model are not known, whereas for CAPM, there is only one fundamental factor: the market portfolio.
IV. The CAPM is based upon less restrictive assumptions than the APT model.
A. I and III
B. I and IV
C. II only
Explanation: II is incorrect because only the CAPM defines equilibrium as a state where all securities have the same reward to risk ratio. APT, on the other hand, defines equilibrium as a state where no riskless profit may be had.

IV is incorrect because the APT model is based upon less restrictive assumptions than the CAPM.

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