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:

F-Ratio

The F-ratio is a statistic used to compare the variance between groups with the variance within groups in analysis of variance (ANOVA) testing.

Factor A

A variable manipulated by the researcher in an experiment to observe its effect on the dependent variable; often used in the context of factorial designs.

MSA

An abbreviation for Metropolitan Statistical Area, which is a geographical region with a relatively high population density at its core and close economic ties throughout the area.

Critical Value

A point on the scale of a test statistic beyond which the null hypothesis is rejected in favor of an alternative hypothesis.