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Compare and contrast the theoretical underpinnings of CAPM and APT. Critically discuss the relative strengths and weaknesses of each model drawing on the empirical evidence
Compare and contrast the theoretical underpinnings of CAPM and APT. Critically discuss the relative strengths and weaknesses of each model drawing on the empirical evidence for both models.
Discussion should focus on equilibrium versus arbitrage and the stronger preference restrictions of the CAPM versus the stronger statistical restrictions on returns via the factor model of the APT. The Roll critique of CAPM tests is clearly importan. The APT should hold approximately for any set of assets while the CAPM should hold exactly for the full universe of assets.
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