TAILIEUCHUNG - Lecture Investments (6/e) - Chapter 11: Arbitrage pricing theory and multifactor models of risk and return

Chapter 11, Arbitrage pricing theory and multifactor models of risk and return. In this chapter, we show how such no-arbitrage conditions together with the factor model introduced in Chapter 10 allow us to generalize the security market line of the CAPM to gain richer insight into the risk-return relationship. | Chapter 11 Arbitrage Pricing Theory and Multifactor Models of Risk and Return Single Factor Model Returns on a security come from two sources Common macro-economic factor Firm specific events Possible common macro-economic factors Gross Domestic Product Growth Interest Rates Single Factor Model Equation Ri = E(ri) + Betai (F) + ei Ri = Return for security i Betai = Factor sensitivity or factor loading or factor beta F = Surprise in macro-economic factor (F could be positive, negative or zero) ei = Firm specific events Multifactor Models Use more than one factor in addition to market return Examples include gross domestic product, expected inflation, interest rates etc. Estimate a beta or factor loading for each factor using multiple regression. Multifactor Model Equation Ri = E(ri) + BetaGDP (GDP) + BetaIR (IR) + ei Where Ri = Return for security i BetaGDP= Factor sensitivity for GDP BetaIR = Factor sensitivity for Interest Rate ei = Firm specific events Multifactor SML Models E(r) = rf + BGDPRPGDP + BIRRPIR Where BGDP = Factor sensitivity for GDP RPGDP = Risk premium for GDP BIR = Factor sensitivity for Interest Rate RPIR = Risk premium for GDP Arbitrage Pricing Theory Arbitrage - arises if an investor can construct a zero investment portfolio with a sure profit. Since no investment is required, an investor can create large positions to secure large levels of profit. In efficient markets, profitable arbitrage opportunities will quickly disappear. APT & Well-Diversified Portfolios rP = E (rP) + bPF + eP Where: F = some factor For a well-diversified portfolio: eP approaches zero Similar to CAPM Portfolios and Individual Security F E(r)% Portfolio F E(r)% Individual Security Disequilibrium Example E(r)% Beta for F 10 7 6 Risk Free 4 A D C .5 Disequilibrium Example Short Portfolio C Use funds to construct an equivalent risk higher return Portfolio D. D is comprised of A & Risk-Free Asset Arbitrage profit of 1% APT with Market Index Portfolio E(r)% Beta (Market Index) Risk Free M [E(rM) - rf] Market Risk Premium APT applies to well diversified portfolios and not necessarily to individual stocks. With APT it is possible for some individual stocks to be mispriced - not lie on the SML. APT is more general in that it gets to an expected return and beta relationship without the assumption of the market portfolio. APT can be extended to multifactor models. APT and CAPM Compared

• Quỹ đầu tư
• Investment environment
• Lecture Investments
• Active portfolio management
• Capital markets
• Arbitrage pricing theory
• Multifactor models
• Investment analysis
• Portfolio management
• Investment management
• Investment theory
• Investment companies
• Time value of money
• Doctoral thesis summary
• The impact of the investment environment
• Investment decisions
• Small and medium enterprises
• Investment decision of the business
• Characteristics of investment