One of the Main Problems with the Arbitrage Pricing Theory

question 33

Multiple Choice

One of the main problems with the arbitrage pricing theory is __________.

• A) its use of several factors instead of a single market index to explain the risk-return relationship
• B) the introduction of non-systematic risk as a key factor in the risk-return relationship
• C) that the APT requires an even larger number of unrealistic assumptions than the CAPM
• D) the model fails to identify the key macroeconomic variables in the risk-return relationship

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Definitions:

Attribution Theory

A concept in psychology that explains how individuals infer the causes of their own and others' behavior.

Explanations

The process of making something clear or understandable, often used to describe how phenomena occur or why they are as they are.

Behaviors

Observable actions or reactions of an individual, often in response to the environment or stimuli.

Groupthink

A psychological phenomenon that occurs within a group of people in which the desire for harmony or conformity in the group results in an irrational or dysfunctional decision-making outcome.