Capital Asset Pricing Model (Capm)vs.Arbitrage Pricing Theory (Apt).
Asset Pricing Model are very useful tools that enable financial annalists or just simply independent investors evaluate the risk in an specific investment and at the same time set a specific rate of return with respect the amount of risk of an individual investment or a portfolio. The CAPM method while simpler than the ATP method takes into consideration the factor of time and does not get too wrapped up over the Systematic risk factors that sometimes we can not control. In this paper, I will explain some of the advantages and disadvantages of the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT).
These are tow methods that while different from each other, they try to explain and provide the same …show more content…
In conclusion, The CAPM pricing method while simpler and less detailed than the APT, provides with a basic and accurate picture of the risk to return ration when evaluating an investment. It provides for a concise way to evaluate risk without taking into consideration factors although pertinent more than often bring confusion and could lead to false conclusions. The ATP method is a very detailed method that uses a number of variables that we could custom to our investment needs.
Even though it is very detailed, it does not take into consideration changes over long periods of time. The APT method is more useful for short term investments. There is no doubt in my mind that the CAPM method is the better of the two methods for today’s market conditions. At the end we have to remember that these two pricing methods could be a lot more powerful if used in conjunction with each other. “In some of its basic ideas, but not in its details, the APT builds on rather than replaces the CAPM.”3
3. Anonimous (1991). Risk and Return. EBSCO Web
Anonymous (1991). Risk and Return. EBSCO Web
Even Otuteye (1998). The arbitrage pricing dichotomy http://proquest.umi.com/pqdweb?index=0&did=413172211&SrchMode=1&sid=1&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1187652743&clientId=29440
McCracken, M. E. (2005). CAPM. http://www.teachmefinance.com/capm.html
D.B. Hamm (2006). Return, Risk & The market Security Line.