One of the Main Problems with the Arbitrage Pricing Theory

question 43

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 nonsystematic risk as a key factor in the risk-return relationship
• C) that the APT requires an even larger number of unrealistic assumptions than does the CAPM
• D) the model fails to identify the key macroeconomic variables in the risk-return relationship

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Definitions:

Production Increases

A rise in the amount of goods and services produced over a given period of time by a business or economy.

High-low Method

A technique used in accounting and finance to estimate the variable and fixed components of a company's costs based on the highest and lowest levels of activity.

Total Fixed Costs

The sum of all expenses that remain constant regardless of the level of production or business activity.

Productive Month

A period in which there is a high level of output or work accomplishment, often measured in terms of productivity metrics in a business context.