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:

Little Albert

A famous psychology experiment conducted by John B. Watson and Rosalie Rayner, involving classical conditioning to induce a fear response in an infant named Albert.

White Rat

Typically refers to albino rats used as subjects in scientific research, especially in psychological experiments on conditioning and behavior.

Discriminative Stimulus

Any stimulus, such as a stop sign or a doorknob, that provides the organism with a cue for making a certain response in order to obtain reinforcement.

Watson's Little Albert

An experiment conducted by John B. Watson demonstrating classical conditioning by causing a young boy to develop a phobia of white rats.