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:

Bystander Effect

The phenomenon where individuals are less likely to offer help to a victim when there are other people present.

Two-Factor Theory

A psychological theory proposing that human emotions are based on two factors: physiological arousal and a cognitive label of the arousal.

Catharsis Hypothesis

The idea that expressing or releasing strong emotions leads to relief or emotional cleansing.

Social Exchange Theory

A theory that explains social change and stability as a process of negotiated exchanges between parties, predicting human relationships based on perceived costs and benefits.