arbitrage pricing theory and multifactor models of risk and return

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1、FinalPDFtoprinterCHAPTERTENArbitragePricingTheoryandMultifactorModelsof10RiskandReturnTHEEXPLOITATIONOF securitymispricinginrisk,energypricerisk,andsoon.Thesemodelssuchawaythatrisk-freeprofitscanbeearnedalsoleadustoamultifactorversionoftheiscalledarbitrage.Itinvolvesthesi

2、multane-securitymarketlineinwhichriskpremiumsouspurchaseandsaleofequivalentsecuri-derivefromexposuretomultiplerisksources,tiesinordertoprofitfromdiscrepanciesineachwiththeirownriskpremium.theirprices.PerhapsthemostbasicprincipleWeshowhowfactormodelscombinedofcapitalmarket

3、theoryisthatequilibriumwithano-arbitrageconditionleadtoasimplemarketpricesarerationalinthattheyrulerelationshipbetweenexpectedreturnandoutarbitrageopportunities.Ifactualsecu-risk.Thisapproachtotherisk–returntrade-ritypricesallowforarbitrage,theresultwilloffiscalledarbitra

4、gepricingtheory,orAPT.bestrongpressuretorestoreequilibrium.Inasingle-factormarketwheretherearenoTherefore,securitymarketsoughttosatisfyextra-marketriskfactors,theAPTleadstoaa“no-arbitragecondition.”Inthischapter,meanreturn–betaequationidenticaltothatweshowhowsuchno-arbitr

5、ageconditionsoftheCAPM.Inamultifactormarketwithtogetherwiththefactormodelintroducedinoneormoreextra-marketriskfactors,theChapter8allowustogeneralizethesecurityAPTdeliversamean-betaequationsimilarmarketlineoftheCAPMtogainricherinsighttoMerton’sintertemporalextensionofthein

6、totherisk–returnrelationship.CAPM(hisICAPM).WeasknextwhatfactorsWebeginbyshowinghowthedecompo-arelikelytobethemostimportantsourcessitionofriskintomarketversusfirm-specificofrisk.Thesewillbethefactorsgeneratinginfluencesthatweintroducedinearliersubstantialhedgingdemandstha

7、tbroughtchapterscanbeextendedtodealwiththeustothemultifactorCAPMintroducedinmultifacetednatureofsystematicrisk.Mul-Chapter9.BoththeAPTandtheCAPMthere-tifactormodelsofsecurityreturnscanbeforecanleadtomultiple-riskversionsoftheusedtomeasureandmanageexposuretosecuritymarketl

8、ine,therebyenrichingtheeachofmanyeconomywidefactorssuchasinsightswecanderiveabouttherisk–returnb