RSM332H1 Study Guide - Final Guide: Efficient-Market Hypothesis, Growth Stock, Capital Asset Pricing Model

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20 Mar 2013

Document Summary

Arbitrage pricing theory (apt) is a factor-based model of expected returns, much like the capm but with fewer restrictions. No need to talk about investor utility or risk aversion. No need to find a proxy for the market portfolio , nor is everyone predicted to own it. Capm can be considered a special case of apt. Its variations should affect a large amount (if not all) of the stocks under consideration. Its impact on prices should come from its unpredictable changes. The risks should be un-diversifiable (generally they will be macroeconomic variables) Accurate and timely information must be available (or you won"t be able to test the relationship) A large number of rational, profit-maximizing investors exist, who actively participate in the market by analyzing, valuing, and trading securities. The markets must be competitive, meaning no one investor can significantly affect the price of the security through their own buying or selling.

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