An Advantage of the APT Over CAPM Is

question 2

Multiple Choice

An advantage of the APT over CAPM is:

• A) APT can handle multiple factors.
• B) if the factors can be properly identified, the APT may have more explanation/predictive power for returns.
• C) the APT forces unsystematic risk to be negative to offset systematic risk; thus making the total portfolio risk free, allowing for an arbitrage opportunity for the astute investor.
• D) APT can handle multiple factors; and if the factors can be properly identified, the APT may have more explanation/predictive power for returns.
• E) All of these.

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Definitions:

Demand Deposits

Demand Deposits are bank account funds that can be withdrawn at any time without any advance notice to the bank.

Original Maturity

The initial fixed period for which a financial instrument, such as a bond or loan, is issued before it is due for repayment.

Required Reserves

The least amount of money that a bank is required to keep on hand as a safeguard for deposits, in compliance with the rules set by central bank authorities.

Demand Deposits

Bank account funds that are available on demand without any delay or penalties, like those in checking accounts.