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:

Task Specialization

The process of dividing work into specific tasks that are assigned to individuals based on their skills or expertise.

Interdependence

The mutual reliance between two or more groups, organisms, systems, or entities where each is dependent on the others for certain needs.

Natural Processes

The organic and inherent procedures and events occurring in the environment and the physical world.

Unfavorable Norms

Social rules that are perceived negatively by society or certain groups, often because they lead to undesired outcomes.