QUESTION TWO (20 Marks) You have been hired at the investment firm of Big & Small as financial advisor. One of its clients a renowned business entrepreneur in Dar es salaam and an MBA graduate of Mzumbe University doesn't understand the relevancy of test that has to be conducted in order to verify the Capital Asset Pricing Model (CAPM). The client understand that an asset held in a well-diversified portfolio may have little, or even no risk at all. The CAPM is a general equilibrium market model developed to analyze the relationship between risk and required rates of return o assets when they are held in well-diversified portfol: Arbitrage Pricing Theory (APT) is an approach to measu quilibrium risk/return relationship for a given s the equilib unction of multiple factors, rather than the the market return) used by the CAPM. The a complex mathematical and statistical then. int for several factors (such as GNP and + w in determining the required return ch to measuring stoc as a function of factor (the market based on complex ma han the single M. The APT is stical theory but p and the level can account for s return determinie of inflation) m for a sk factors. It is likely articular stock. The CAPM is a single-factor model the APT can include any number of risk factors. It is that the required return is dependent on fundamental factors such as the GNP growth, ex inflation, and changes in tax laws, and that differ groups of stocks are affected differently by these facto Thus, the APT seems to have a stronger theoretical footing than does the CAPM. However, the APT faces several major hurdles in implementation, the most severe being that the APT does not identify the relevant factors such that complex mathematical procedure called factor analysis must be used to identify the factors. To date, it appears that only three or four factors are required in the APT, but much more research is required before the APT is fully understood and presents a true challenge to the owever, the client doesn't understand the te potential test that has to be conducted to verify C Required Discuss the conducted in Iss the relevancy potential test that h icted in order to verify the Capital Asset Pri hat has to be Set Pricing Model (20 MARKS) QUESTION TWO (20 Marks) You have been hired at the investment firm of Big & Small as financial advisor. One of its clients a renowned business entrepreneur in Dar es salaam and an MBA graduate of Mzumbe University doesn't understand the relevancy of test that has to be conducted in order to verify the Capital Asset Pricing Model (CAPM). The client understand that an asset held in a well-diversified portfolio may have little, or even no risk at all. The CAPM is a general equilibrium market model developed to analyze the relationship between risk and required rates of return o assets when they are held in well-diversified portfol: Arbitrage Pricing Theory (APT) is an approach to measu quilibrium risk/return relationship for a given s the equilib unction of multiple factors, rather than the the market return) used by the CAPM. The a complex mathematical and statistical then. int for several factors (such as GNP and + w in determining the required return ch to measuring stoc as a function of factor (the market based on complex ma han the single M. The APT is stical theory but p and the level can account for s return determinie of inflation) m for a sk factors. It is likely articular stock. The CAPM is a single-factor model the APT can include any number of risk factors. It is that the required return is dependent on fundamental factors such as the GNP growth, ex inflation, and changes in tax laws, and that differ groups of stocks are affected differently by these facto Thus, the APT seems to have a stronger theoretical footing than does the CAPM. However, the APT faces several major hurdles in implementation, the most severe being that the APT does not identify the relevant factors such that complex mathematical procedure called factor analysis must be used to identify the factors. To date, it appears that only three or four factors are required in the APT, but much more research is required before the APT is fully understood and presents a true challenge to the owever, the client doesn't understand the te potential test that has to be conducted to verify C Required Discuss the conducted in Iss the relevancy potential test that h icted in order to verify the Capital Asset Pri hat has to be Set Pricing Model (20 MARKS)
